Private money loans are typically associated with financing from an individual or non-institutional group, instead of a bank, finance company, credit union or institutional lender. Private money loans also stand in contrast with loans made by a public entity, such as a government agency.
Private money financing has been used for both commercial and consumer loans, since the invention of money. Today’s private money loans include various types of financing programs:
Person-to-person private money loans
Also called peer-to-peer loans, P2P financing refers to loans between individuals. This can be sisters lending each other money, or one friend lending cash to another friend.
In the age of the internet, however, P2P loans have grown to encompass more individual lending between people who may have never met each other before. P2P loan websites allow personal loan borrowers to connect with individuals willing to lend cash on an individual basis.
This approach has the potential of providing individuals with a potentially higher rate of return than regular savings accounts and many investment funds. Unfortunately, it also carries an increased risk of default and loss for the person lending the money.
Private investment loans
Many of the above peer-to-peer personal loans are actually peer-to-peer investment loans, with the funds being used to finance the borrower’s project. These are basic types of private investment loans.
However, private investment loans are popular vehicles for many entrepreneurs, start-ups and small business owners. As the name suggests, private investment loans are commercial financing from private, non-institutional sources. These private investors could be real estate investment trusts, an informal investment circle or individual investors looking for investment opportunities.
For the businesses or entrepreneurs receiving these investment loans, the financing can provide much-needed opportunities for growth and expansion.
Hard money loans
Hard money loans are also often called asset-based loans, because the loans are based primarily on the market value of the asset or collateral being used as security for the loan.
Unlike credit loans, which rely heavily on the loan borrower’s credit qualification, hard money loans are able to lend funds to individuals with little or bad credit ratings. Many hard money loans also ignore the borrower’s income and personal asset documentation. Their primary focus is on the value of the asset. More to the point, hard money lenders just want to be sure that if the borrower defaults, the asset can be quickly sold so as to recoup the lender’s loan principal and interest charges.
Hard money loans are typically short-term financing programs used primarily for commercial investments, especially real estate development projects and purchases.
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