A private lender is one who is not associated with a traditional lender such as a bank or other such financial institution.
A private lender is one who is not associated with a traditional lender such as a bank or other such financial institution. Otherwise known as “private financing”, private lender loans often have higher interest rates than their counterparts that are provided by banks or other prime lenders. However, on the flip side, private loan lenders are not bound by the same regulations that traditional lenders face, and hence have a greater risk appetite for financing projects that traditional lenders would have to stay clear of.
Who is a private lender?
As noted above, a private lender can be anyone that does not affiliate themselves with a traditional financial institution. This definition encompasses everyone from a single individual to a private group or a full-fledged company. In the case of an individual private lender, this could be a person looking to lend out their personal funds to borrowers to achieve returns on them. On a slightly larger scale, groups of individual investors may form a pool of capital to deploy across private loans. This is called a syndicate. Lastly, if a legal entity is formed with the intention of originating and executing new private loans, this is an example of a private lender company.
What types of private loan options are on offer?
Much like banks and other traditional financial institutions, private lenders can offer a similar product suite comprised of mortgages, auto loans, bad credit loans, student loans, and/or personal loans as per the needs of the individual borrower. In a lot of cases, private lenders are seen as a lender of last resort after the traditional funding avenues are exhausted. In a lot of cases, borrowers with bad credit who may not be able to obtain a loan from a traditional financial institution can do so with a private lender. This is because as mentioned previously, these lenders are not restricted to the same regulations as traditional lenders in the financial system, which allows them with more leeway to pursue loans with aggressive risk profiles.
It is pertinent to note though that different private lenders may have different guidelines and risk parameters. Hence, while one private lender may offer loans to borrowers with bad credit, another lender may be hesitant to do so.
Advantages of Private Lender Loans
Working with a private lender can offer some advantages as compared to other sources of traditional funding. Some of these include:
- Fast: Because these loans are unregulated, they do not have to adhere to the stringent underwriting policies and procedures that are followed by traditional institutions. This saves time in the origination process and allows the loans to be approved and funded on an accelerated timeline.
- Flexible: Providers of private personal loans are often open to negotiating the terms and structure of a loan as they have the regulatory freedom and authority to do so. Therefore, if there are certain circumstances that the borrower would like to discuss, the chances that they can be incorporated into the loan structure are far higher with a private lender than with a traditional institution.
- Bad Credit: Private loan providers set their own risk appetites and onboard loans that they are comfortable with. This gives them a wider scope of applicants, including those with poor credit profiles who may not otherwise be able to obtain a loan.
Downsides of Private Lender Loans
- Upfront Fees: Private loans may often have higher upfront fees that are charged on top of the interest rate that is paid periodically. Prior to signing on the dotted line, it is in the best interests of borrowers to ask whether an upfront fee would be charged, and if so, how much it would be for.
- Higher Rate: Because private loan lenders are often seen as a lender of last resort, they take on a greater degree of risk than traditional institutions. This risk may be in the form of lower security values that serve as collateral for the loan or the fact that the loan is entirely unsecured and/or the borrower has a poor credit score. Due to this outsized risk they take, they have to be compensated with higher rates. Hence, the rates on private loans tend to be much higher than those with traditional institutions.
- Potentially restrictive: If a private mortgage or auto loan is obtained, the lender may impose covenants to restrict particular activities such as pursuing a sale of the house prior to a certain time period elapsing.
When is a private lender loan right for you?
- Poor credit: If a borrower has poor credit and cannot secure a loan from traditional institutions, then they may find that working with private lenders allows them to obtain funds more easily. This is because unlike traditional financial institutions, private lenders look at more than just the credit score when structuring a loan.
- Quick money: If time is of the essence, then a private lender loan could be a potential avenue. Because they do not have to undergo the same processes and checks of a traditional lender, the customer timeline from request to funding is significantly shorter.
- If you are looking for flexibility: In a lot of cases, private lenders are more willing to integrate specific features that may be important to the borrower. For example, if the borrower wants to increase the term of a mortgage to 30 years, this may be negotiated with a private lender. A traditional lender, on the other hand, would normally cap it off at 25 years.
Before any decision is made to go with a private lender, evaluate the above prospective benefits and downsides, and match it up with your specific financial situation and profile. While there are specific advantages to using private lenders, it is ultimately up to the borrower to determine whether the added costs are justified for their needs.