What Is a Private Money Lender and How Do You Find the Best One?
If your credit score is less than perfect, getting a traditional loan from a financial institution may prove to be problematic. However, the wide availability of payment platforms has made private money lenders and peer-to-peer lending increasingly common.
The credit criteria for these types of loans tend to be more relaxed, but the result is that the interest rates are often higher. Understanding this alternative to a bank loan gives you a new credit option to consider. Keep reading to learn more.
What Is Private Money Lending?
You can get an unsecured personal loan through private money lending. This loan is issued by a private party rather than a bank, credit union or other formal financial institution. These online platforms or marketplaces bring together private lenders and borrowers outside of the formalities and protections of the regulated banking system.
Pros of Private Money Lenders
Lending standards tend to be lower because it is not a traditional lender or a formal banking institution.
Private lenders are most interested in your ability to prove that you have a recurring source of income and that you will repay the loan.
You can establish your income by simply providing bank statements or recent pay stubs.
There is a short application process and you often know if you are approved or denied on the same day.
Because your credit plays a smaller role in the process, there is less for the lender to verify.
If you need short-term money quickly, a private personal loan can be a good source of funds rather than traditional financing.
Cons of Private Money Lenders
Private personal loan rates are usually higher because the loan is approved based only on income and not credit history. This puts these types of loans at a higher risk of nonpayment. To offset this risk, the lender sets a higher interest rate.
If a private lender makes enough high-interest-rate loans, even with a higher number of defaults, it should still be able to make money.
The high cost of the loans that get paid back will cover those that do not. As the borrower, this added cost should be taken into account when deciding if this type of loan is right for you.
How To Find the Best Private Money Lenders
The fastest way to find a private personal loan is to search for private lenders online. It is important to do some research before sharing your personal information with a party you find online to ensure its credibility. Here are some key takeaways:
Once you have selected a few options, you should carefully read the terms and conditions.
Often, private lenders will come through referrals within your real estate investments or network.
Try to build your contact list from people such as friends, family and colleagues.
Make sure that you have the information and documents needed to complete the application.
Above all, since it is easy to rapidly click through some of these sites, make sure you are cautious and thorough.
How To Apply to a Private Money Lender
Once you have selected the lender that fits your needs, the process should be very straightforward:
Follow the prompts to complete the online forms.
Gather the required documentation. You might be required to provide your recent pay stubs or bank statements. This information can usually be submitted online.
Once your information has been provided to the lender, you can expect a relatively quick decision. If you receive a positive response, you may be able to get your loan funded the same day.
Ultimately, there are advantages and drawbacks to taking out a private personal loan to meet your cash needs. Compared to a personal loan from a bank, the private lending process tends to be streamlined and very simple. However, the interest rate you will pay for this type of loan will be significantly higher.
Borrowers with weak credit are usually drawn to this type of loan because it is easier to secure. When deciding to take this type of loan, you should weigh the cost of capital against your needs.
Final Take To GO
Individuals who wish to consolidate credit card balances, need money for a large purchase such as an investment property or are looking to take on a new project will often use personal loans to meet their cash needs. However, not everyone meets the requirements of this type of loan. If you or a family member don’t have great credit and can’t get a conventional mortgage, you may want to seek the help of private investors or money lenders.
FAQ
Here are the answers to some of the most frequently asked questions regarding private money lenders.
Can I borrow money from a private lender?
Yes, you can borrow money from a private lender but be aware they are not affiliated with a bank or credit union. These private lenders can range from individuals to organizations.
What is a bridge loan?
Similar to a private personal loan, a bridge loan is a short-term loan used to bridge the gap between buying a home and selling your previous one. If you are a real estate investor or want to buy before you sell, you won't have the profit from the sale to apply to your new home's down payment and may need this form of loan.
What is meant by private money lenders?
Private money lenders are simply lenders who aren't associated with a traditional financial institution such as a bank or credit union.
Who is the largest private lender?
One of the largest private lenders is Quicken Loans. They are a large online mortgage lender that is not part of a larger bank or other financial services corporation.
Caitlyn Moorhead contributed to the reporting for this article.
This article originally appeared on GOBankingRates.com: What Is a Private Money Lender and How Do You Find the Best One?
