The Pros and Cons of a Private Money Loan

A private money loan is becoming a more common tool that many borrowers are utilizing. With private money brokers at an all-time high, more people are faced with the issue of financing their project privately.

Finding a Lender

Finding a private money lender is usually not easy. They are typically situated in certain geographic areas and will not lend to locations outside of their area. If you live in a remote or rural area, you may not have the option of a private lender.

You will often not be able to find a private money lender in the phonebook and will be required to ask around and see if anyone knows how to find one. This can make locating the lender you need a difficult part of the process. With traditional financing, you know exactly where to go to find it.

Application Process

The paperwork and application process of the private money loan is a definite advantage. If you do not enjoy paperwork and hate all of the red tape associated with traditional mortgages, then private money is the way to go. They typically streamline the process and have very few forms and documents to fill out. You can even eliminate a formal appraisal in some cases. Therefore, the fees associated with setting up the loan are also typically smaller than with traditional loans. Most private money lenders are easy to work with and get the process moving quickly.

Unique Situations

If you have a unique situation, private money lenders are definitely an advantage over traditional methods. Many circumstances that would not even be considered by a bank will be commonplace with hard money loans.

For example, if you own a large ranch and you want to refinance it, an appraisal cannot accurately display the value of the property. A bank will only finance you for a certain percentage, based on the appraisal report. A private money lender, on the other hand, will use a common sense-approach and determine the amount the ranch is worth. They will consider your loan and your ability to repay it. They will look at the market and determine if they could sell the ranch and recoup their losses in the event of default.

While you are not guaranteed to get a private money loan, your odds are a lot better if there is anything out of the ordinary.

High Interest

A private money loan will have significantly higher rates when compared to the traditional mortgage. This is definitely a disadvantage compared to traditional loans. While you might be able to obtain a mortgage for a low interest rate by shopping around, private money lenders might charge you anywhere from 10% to 20%.

While it is a lot of money to pay in interest, you will not be able to obtain the money you need through any other channels. You have to decide how important the project is and if you want to proceed.

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