Why You Should Avoid Private Lenders If You Can

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By Jacob Maslow

Do you need a personal, student, real estate, or business loan but find it hard to get approval from a bank or credit union? If so, perhaps you have considered approaching a private lender to help you. Private lenders are usually moneyed individuals (sometimes they are companies) who offer money for loans.

Private lenders loan you money without requiring the usual qualification guidelines banks or private lending institutions need. The advantages for you are faster application times and the fact that many private lenders are more willing to help people with bad credit. However, these private loans are risky for you, the borrower, and the lender also takes some risks.

However, there are fewer regulations surrounding loans from these private lenders, allowing you more freedom to use the loan for whatever your financial requirements are at that given moment. Private lenders usually charge a higher interest than the going rate. They calculate this depending on their risk, and most take all the due diligence precautions.

Loan applications are strenuous, mainly because of the institutions’ time to process them. You are also not guaranteed that you will qualify for the amount needed. Under these circumstances, a loan from a private lender may seem ideal, but there are several reasons why you should avoid them if you can.

Private Money Lenders Want To Make Money

Risk mitigation is principal for a private lender because their goal is to profit from your loan through the interest you pay. Despite being willing to risk borrowing the money, they may consider your credit score and how long you need the money before deciding on their pricing strategy.

They will charge a higher interest rate, but there are often other hidden fees like a service charge and even a one-month holdback in some cases. Furthermore, if you are getting a private mortgage, you pay for their and your legal fees to draw up the documents.

Not All State and Federal Regulations Apply

There are several types of private lenders. Sometimes, someone in your family or circle of friends is willing to help with the financing. These private money loans usually have more flexible terms and lower interest rates based on your relationship. On the other hand, other private lenders may demand collateral or mitigate their risk with a higher interest rate.

It is legal for someone to loan you money if they are not a bank or credit union, but some federal and state usury laws apply to private lenders. Banking regulations may also apply in some cases because they limit how many loans private lenders can give without a banking license.

The Reputation of the Lender

Unfortunately, private lenders tend to bring up negative connotations in most people’s minds because of the impression that they take advantage of people or have unrealistic terms. Most private lenders do not reflect this type of behavior, but when you decide to approach a private lender for money, make sure you know a few things about them. You don’t want to find yourself involved with someone with ill-repute and make sure they have the money. You don’t want to find out that they suddenly don’ have the money at the last minute, especially if you have agreed to buy a house or rent a space, which can cost you more money if you cancel.

Understand the Loan Agreement

Whether you lend from a bank or private lender, there is a loan agreement that you must honor. Read and fully understand the terms and costs involved before signing for the private loan, and ensure that you can meet these.

Shorter Payment Period

Private lenders have shorter repayment periods than banks, meaning higher monthly payments. Higher payments mean that you could find it challenging to repay the loan, and if you can’t make payments in time, late charges will apply.

Generally, private lenders want to avoid the time and cost of foreclosing on properties or other assets since their main concern is income from the interest rates. However, if you fail to meet the terms of your agreement, they will act like any other lender.

Final Take

Most private lenders generally practice the expected standards of operating. Their ability to offer loans to people who fail to meet the minimum credit score requirements and avoid the longer approval times has undoubtedly helped millions of Americans. However, several reasons make it better to borrow from a bank, and the most obvious are lower interest rates and longer repayment terms, ensuring that the loan costs you less in the end.

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