Private money lenders are the non-institutional lenders that offer financing to the individuals. Private money loans are usually used to finance a real estate transaction and these are usually secured by a mortgage note or a deed of trust. Generally, a borrower wants to take out a private loan in case he/she fails to obtain a loan from the institutional sources. Here we talk about the reasons why people look for private money -
1. Being denied an institutional loan
A lot of factors may come in the way of getting approved for an institutional loan. A good credit score is required to obtain an institutional mortgage loan. Before offering you a loan, a bank reviews your credit report. In case your credit score is not satisfactory, you may not get the loan at all or you may get the loan at a relatively high rate of interest. In addition to the credit, you need to fulfill a lot of criteria related to your income, debt to income ratio, assets etc so as to get the institutional loan approval. Well established institutional lenders also take into consideration the type of the property that you are planning to purchase before making the final loan approval. All these have led to the parallel growth of the private non-institutional money lending business. Private lending is more relationship-based, flexible and tailor-made to the customers. Here, it is to be noted that borrowers will face more difficulty in obtaining institutional loans from January 2014 as the new qualified mortgage rules will come into effect. These rules are aimed at curbing reckless and abusive lending practices followed by some lenders.
2. Higher acceptability of collateral by the private lenders
Mortgage loan business is based upon collateral. To take out a mortgage loan, borrowers have to place some real assets as collateral. This collateral serves as a sort of security to the lender in case the borrower default in making payments. Here, it is to be noted that collaterals accepted by an institutional lenders are limited. On the contrary, private money lenders accept a wide ranging types of collateral. Some of the collaterals that are not accepted by the institutional lenders as security are accepted by the non-institutional private lenders as security. This kind of liberty offered by the private lenders, helps the borrowers take out a private loan more easily than an institutional loan.
3. Easiness of taking out a private loan
Overall terms and conditions of taking out a private loan are relatively easy than a loan offered by a bank. A borrower needs to abide by more and stricter conditions to obtain a mortgage loan. In addition to this, a private loan does not require much checks and verification and this can be processed much quickly.
All these positive features associated with private lending, has led to its growth along with the institutional money lending. However, in case of private funds, borrowers may have to pay higher rate of interest and moreover the risks of getting cheated are also higher in case of private financing.