Is Private Lending Right For You?

If you’re looking to invest in real estate, private lending can be an ideal choice for those looking for alternative loan options to traditional financing institutions. This option has become increasingly popular as banks and loan offices have tightened their restrictions on who may qualify for loans or mortgages.

In this article, we’ll unfold the details of what private lending means, as well as some facts to consider before enrolling in either a public or private loan.

What is Private Lending?

Private lending, also known as hard money lending or peer-to-peer lending, is an option borrowers have if they are not eligible to invest with traditional institutions (e.g., banks, loan offices, government agencies). These are individual investors who mostly set their own guidelines, standards, and profiles with whom they are willing to invest.

This can be beneficial for those with less than desirable credit or those who want to set their own payback plan. Because private lending is based more on relationships than transactions, the investor and borrower can agree on their own unique terms.

Why Choose Private Lending?

There are many pros and cons to choosing a public institution over a private (and vice versa), but these risks may be worth it based on your unique situation. In general, there are four types of borrowers who may find private loans to be advantageous over public ones:

  • Property-flippers with the intent to resell
  • Property-flippers with the intent to own and rent out
  • Builders and developers investing in vacant lots to design and build their own property
  • Commercial property investors

Because each of these types of borrowers have unique purposes, a private loan may be a good option. As Fortune Builder explains it:

“Borrowing from a private money lender will result in a quicker loan, as you do not have to navigate the same process that comes with traditional lending institutions. Moreover, private money lenders will take risks that most banks are not willing to. Private money, for all intents and purposes, is a fundamental tool to the average investor.”

However, it’s also important to consider the risks that borrowers may face in dealing with private investors. Because there is little oversight in their dealings, private lenders can set higher interest rates than you would get at a public institution. Additionally, you may face the risk of dealing with potential scams because of how unregulated the private lending industry is.

Is Private Lending Right for You?

Whether you’re flipping a home or investing in your business, private lending may be the best option for your unique situation. But before you sign the papers, compare interest rates from competitors and always make sure that the lender you’re dealing with is the real deal. Come in to a First Bank near you to discuss your private lending options.

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Sources:

CNBC: http://www.cnbc.com/id/46796860
NASDAQ: http://www.nasdaq.com/article/pros-and-cons-of-privatemortgage-loans-cm275722
Fortune Builders: http://www.fortunebuilders.com/becoming-private-money-lender-part-1/