The Rules of Thumb blog from MoneyThumb often discusses the lending niche. Many lenders, both private and public, use our world-class PDF financial file converters to make the lending process run much more smoothly. Today we will discuss private vs public lending and talk about the major pros and cons of each so that our readers can completely understand both sectors.
The application process of a bank loan could ultimately be described as never-ending. They prefer an almost perfect credit score, a clean financial history, explanation of all incoming and outgoing funds, personal finances and bank statements, W2 or 1099 forms, tax records, profit and loss statements, paycheck stubs, mortgage payment records, a list of assets like real estate and car titles, mutual funds, proof the loan isn’t a gift, a complete list of your debts, such as credit cards, student loans, car loans and child support payments. Obtaining copies of these documents takes time, releases personal secure data and can be a real hassle to provide. Foreclosure, bankruptcy, or less than perfect credit can automatically result in a denial of a loan application.
Private lenders are often an ideal alternative financing option. The paperwork is minimal and hassle-free; receiving approval is much easier to obtain. Private money is asset-based. The approval comes from the value in the asset, and never the borrower’s credit score of financial history. In private money, the asset or collateral is the borrower’s property or business. For bank loans, collateral is, unfortunately, the borrower’s personal vehicle or home. Banks are under government restrictions when it comes to approvals and private money lenders are not.
Both banks and private lenders will require some form of commitment fees, but many banks demand upfront application fees even before approval. Terms and rates vary significantly for each as well. Banks usually offer lower interest and fixed rates to be repaid over set years IF you can get approval. Fluctuating, (adjustable) terms could mean that payments become more expensive over time. Private money lenders tend to have higher interest rates on their bridge loans, but a loan to a range of credit scores and offer a short-term repayment schedule. Terms are also able to be made more flexible when it comes to bridge loans and do not fluctuate.
In contrast, banks have strict guidelines and standards they must follow when it comes to stipulations for lending money. When a hard money lender issues an approval, the approval stands. That is the benefit of choosing the direct funding lender. You can count on them to close the deal. There is no hidden middle man to dodge or multiple levels to clear. All funds are raised and controlled by the lender, decisions are made in-house. Private money lenders can often offer same-day approvals, and after minimal paperwork can process and close your loan quickly. Banks, on the other hand, have been known to leave borrowers waiting for their money for months at a time.
After reading the pros and cons of private vs public lending, you can see why more borrowers than ever are opting for the choice of private lending. Of course, the interest rate is higher, but if you want your money fast without much hassle, private lending is the way to go.