Private Money Loan: What are the Pros and Cons?
Private money loans are ideal for investors who want to buy a property that needs a lot of repairs. Most conventional financial institutions often refuse to grant mortgage loans for properties that have been vandalized or seriously damaged somehow. The private money loan lenders will have fewer requirements than other lenders.
More specifically, private investors focus on the potential profitability of the real estate purchase rather than the borrower’s financial history and credit score. Private money loans are from non-banking institutions. If you are thinking of getting a private money loan, you need to go through the pros and cons of this type of loan.
Pros of Private Money Loans
Compared to banks, private money lenders have few requirements. It means that borrowers have a high chance of getting loan approval. When getting a private loan, you will not have to fill several papers with several signatures.
You need to see why you need the money and enough money to cover monthly instalments for private lenders. Unlike traditional loan lenders and banks, which require you to have collateral, you do not need collateral in private loans. You will not have to use your property or car as security for the loan.
Quick Approval and Funding
When you apply for a loan, you always want to get the money as soon as possible. This is a significant advantage of private loans because it has quick approval and funding. For private money loans, the approval might take one day.
The lender will consider the borrower’s equity, the amount of down payment, and the exit strategy. When the lender finds everything to be okay, they approve the loan as soon as possible. The evaluation criteria are simple, and when you have everything in place, you get the funding quickly.
Private lenders have no written processes. Therefore everything is negotiable. Banks and other traditional lenders have written terms, and they impose them on all borrowers. The bank does not give you the loan if you cannot adhere to the written terms and conditions.
However, as you apply for a private money loan, you can quickly negotiate with your lender on the amount of loan, length of payments, and amount you will be paying per instalment. Private lenders are always free to sit down and agree on terms that favour both of you.
Cons of Private Money Loans
High Interest on Loans
Private money loans have higher interest loans as compared to traditional loans. This is because private money loans have higher risks, and the borrowers get the funding quickly. With few requirements, the lender does not do a background check on the borrowers, imposing risks
of losing the money. The interest rate for private money loans is always approximately 12%-15% per year. If you have another pending loan and apply for a private loan, your interest rate will be 2%-3% higher than the rates of someone applying for it as a first loan. When you take the loan as a second loan, you increase the lender’s risk when they give you the money. Therefore, they need to get more interest.
High Down Payment
When taking private loans, you do not need security to get the loan. However, you need to pay a down payment of about 25%-30% of the loan. This is because private lenders do not take a close look at your credit score. Therefore, they find a way of getting sufficient equity.
They approve your equity by asking for a high down payment as compared to traditional loans. When you fail to raise the down payment, the private lender will fail to approve your loan. Paying 30% of the total loan and the remaining 70% reduces the lender’s risks and increases your equity.
Private Loans Are Short Term
Private loans are short-term, which means the lender gives you 1-3 years to complete the payments. Shorter paying periods mean higher amounts per instalment. Private loans are short-term because of the risks involved.
Giving an extended payment period will increase the lender’s risk because they are unsure if the interest rates will change or if you will default the loan, considering they did not check your credit score. As much as you get quick approval with private loans, you will have a lot of pressure when paying because of the short payment period.
You can get private money loans when an institution sees potential in your business and lends you money to grow the business. Also, you can get private money loans when you do not qualify to get a loan from banks or registered lending institutions.
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