Understanding Private Lenders and How They Work

Today on the Rules of Thumb blog from MoneyThumb we are going to clear up any confusion our readers have about private lenders. Private lenders loan money to individuals or businesses but are not tied to any bank or credit union. A private lender could be an individual or it could be a company. A private lender can fund many different varieties of loans, but two of the most common are real estate loans and personal loans.

Private lenders tend to have faster approval times than banks or credit unions, thanks to streamlined or informal application processes. Many private lenders the PDF financial file converters from MoneyThumb to help speed up the loan approval process. Private lenders may also be more willing to work with people who have bad credit. Many online private lenders have minimum credit score requirements in the bad credit range. And individuals who are private lenders are often not too much concerned with credit scores.

How Private Lenders Work

Loans from private lenders work just like loans from banks or credit unions. You receive funding to buy a property, make a purchase, consolidate debt, make home improvements or any number of other expenses. Then, you pay the amount you borrowed back in installments, with interest. That’s how the lender makes money.

Private Lending Companies

The first major type of private lender is a private lending company. Just like banks, these companies look to profit off of the interest you pay them. When it comes to personal loans, companies referred to as “online lenders” are private lenders that conduct all of their business over the internet.

Some notable private lenders include:

• LightStream
• Best Egg
• LendingPoint
• FreedomPlus
• Avant
• LendingClub
• Payoff
• Prosper

Individual Private Lenders

The second big type of private lender is an individual. Individual private lenders can be investors who are looking to earn money through the interest borrowers pay on loans. This may get them a better return than leaving their money in the bank would. Individual private lenders can also just be people the borrower knows who is willing to help out with funding and may not be as keen to make a profit.

Are Private Lenders Legal?

It’s perfectly legal for organizations other than banks and credit unions to lend money. However, private lenders still have to comply with the usury laws and banking laws of the states in which they operate. In other words, the rates that they’re able to charge are regulated. Plus, depending on the state, a private lender might only be able to lend a certain amount without having a banking license.

What is the Difference Between Private Lenders and Hard Money Lenders?

“Private money” generally refers to funding provided by a family member, friend, business partner, or other acquaintance. In short, a private money loan comes from a source that isn’t typically in the business of providing loans. Given the relationship between the lender and the borrower, a private money loan may mean more flexible terms and a lower interest rate than an equivalent hard money loan.

Meanwhile, “hard money” – whose name refers to the “hard” assets underlying the loan, such as real estate – generally refers to funding provided by non-institutional lending companies with, usually, set and defined lending criteria. Hard money lenders are in the business of lending money and in far greater supply for the typical real estate borrower.

In essence, a hard money lender is a private investor who offers rapid loans with property used as collateral. In other words, a hard money lender does not finance loans with money from deposits, as banks and other financial institutions do.

Instead, a hard money lender is an individual or group that uses private money to quickly finance loans. Because hard money lenders use private funds, you can bypass much of the regulatory hurdles that are part of the conventional loan application process.

To give you an idea of the structure of hard money loans, typical terms might include a 5 percent origination fee and a 13 percent interest rate on a loan. These interest rates have more to do with the local loan market than they do with your specific credit score and financial history.

Because a lender has access to such a valuable asset as collateral, it can insulate itself from a lot of risk in the event that you default on your payments.

On average, you will receive the funds from your hard money loan within just a couple of weeks of your initial application. It’s this quick funding process and the bypass of strenuous loan applications that make hard money so appealing to so many different people.