Benefits and Drawbacks of Using a Private Lender
Private lenders are a very important part of the financial
system in a society. Many people opt to deal with private lenders because of
the ease of doing business with them. However, before you approach a private lender for hard money loans, you
should know the pros and cons of this funding source:
Benefits of Using a
Private Lender
Borrowing money from a private
lender can offer you many benefits that you would not have had access to if
you had chosen a traditional financial institution, such as:
- Fast Approvals: You can secure your loans swiftly with a
private lender. If you visit a traditional lending institution, you will
be required to complete extensive paperwork and meet strict conditions set
by the bank in order to get approved. Approval times drag on for weeks,
sometimes exceeding a month. However, such difficulties do not arise when
dealing with a private lender. You will mostly be meeting the lender directly,
who will assess your project and quickly decide whether you are eligible
for a hard money loan. Most private lenders approve the loans within a
week.
- Customized Lending Terms: With a private lender, you will have
more freedom to create a customized repayment plan. With a big financial
institution, you won’t have this freedom. Instead, you will have to accept
the payment terms set by the bank. However, with a private lender, you can
discuss and come to a mutually agreeable repayment plan that you think is
suitable for you.
- Simplified Repayment Terms:
You will have greater flexibility in structuring your loan
repayment with a private money lender than with a financial institution.
If you take out a loan with a bank, the repayment terms are typically set as
per their defined policies. Though some adjustments may be made, most of
the time you will have to accept the repayment structure set by the bank.
On the other hand, you are likely able to work out a mutually agreeable
repayment term with a private lender.
Drawbacks of Using a
Private Lender
Just as there are benefits to using private lenders, there
are also a few conditions you need to consider:
Higher Interest Rates:
You will have to pay a higher interest rate if you take a loan through a
private lender. Private lenders usually lend money to individuals who may face
difficulty in getting a loan from a big bank, due to bad credit or lack of a
financial track record. Because of the risk attached with lending money to such
individuals, private lenders offset those risks by charging higher rates of
interest.
Short Term Funds:
A private lender is only a suitable choice if you are seeking funds for the
short term. If you are planning to take a loan that extends to multiple years,
then a private lender is not a suitable choice. This is because of the higher
interest rate, which over the long period of time will eat away at your overall
profit. Most lenders you will come across will only be interested in lending
money for the short term – anywhere from 6-18 months.
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