Private money lenders are an essential part of our lending industry, especially in today’s economy. Most private lenders have at least one brick and mortar business and are willing to provide a range of personal loans. In fact, they may be the most important aspect of your personal lending experience.
Private hard money loans are also commonly referred to as business hard money loans and are typically offered by banks with a private lender license. The distinguishing characteristic of these types of loans is that the entire process is completed over the telephone or the Internet. In fact, there are few banks that do not offer some type of personal or unsecured loan product to meet the needs of their owner-occupied consumer-purpose borrowers. In most cases, hard money loans are more expensive than conventional loans because they involve a higher risk premium for the lender.
Although hard money loans do have an edge over traditional banks, the differences between them often come down to a matter of degree. First, traditional banks can use real estate financing typically at the same rates that they would on other types of loans. Second, a borrower who obtains a hard loan from a private lender will have significantly greater credit risk because of the inherently high risk of investment. Third, private hard money lending sources do not typically follow due diligence requirements that traditional banks follow. When these three differences are compared side by side, it is easy to see why the differences between banks and borrowers are significant.
Business investors typically do not have a great deal of credit history. As a result, they typically seek out hard money investors to provide capital for their business needs. As was mentioned above, this type of capital is typically needed quickly, which means that it is typically associated with more risks. Businesses tend to use capital to expand their operations or meet unexpected expenses. This means that borrowers that need access to these funds may face a great deal of credit risk when looking for private investors.
The risk inherent in private funding sources means that they generally charge higher interest rates and require higher loan amounts. In most cases, investors typically borrow money based upon future income and cash flow. As such, these lenders typically do not allow borrowers to take advantage of interest rate reductions that are typically offered to regular banking customers. Business borrowers should be aware that the rate that is charged for a hard money loan will change as the economy changes. This is why it is very important that borrowers understand the terms and conditions of the loans that they are being offered.
The ability to obtain a private money loan is often the difference between success and failure for many real estate investors. In order to find the right lender for the job, potential borrowers should closely comparison shop various lenders before making a final decision on which one to use. It is also important that any potential investors compare the rates that different lenders offer for hard money loans. Because hard money lending is so much easier to obtain, it is typically used as a last resort for hard money investors. Because investors typically need to pay back the full amount of the loan plus interests, this type of financing can be extremely risky for the average borrower.
