Distinguish private lender personal loans from other types of loans. Private lender loans are provided without the borrower having to specify what that the personal loan money will be spent on. In contrast, loans from public lenders are typically categorized by the loan’s use, i.e., mortgage loans, student loans and auto loans.
- Note that a personal loan is very different from a payday loan. Payday loans are very short-term, very high interest loans (sometimes interest rates can be as high as 700%), and typically involve no credit check. These loans are intended to provide financing until the next paycheck is due. A personal loan, on the other hand, typically has a longer-term, as well as much lower interest rates, and may involve some form of credit examination. While both of these can be offered by private lenders, payday loans should be be avoided due to high interest and massive fees for late repayment.
- There are two basic types of private lender loans; those secured by collateral, and unsecured private loans.
- Unlike most public loans, private personal loans are typically secured by a deed of trust or note, in order to ensure repayment to the lender, and typically have higher interest rates than other types of loans.
- Learn the benefits of seeking a private personal loan. There are multiple benefits to seeking a private personal loan as opposed to a traditional bank loan. Typically, if you have poor credit or difficulty attaining a traditional bank loan, a personal loan from a private lender should be explored as a means to obtain credit.
- Possibility of approval with a poor credit score: Traditional banks have a loan granting process that heavily factors in credit score. This is due to the fact that banks are often regulated and therefore have stricter lending practices in order to meet their obligations to depositors. Private lenders have no such obligation, and therefore can lend regardless of your credit score.
- Fast approval process: If you need money quickly, traditional bank loans can often have an onerous and time consuming application process. Loans from private lenders, on the other hand, can often only take a couple of days to move from processing to approval and funding.
- Generally easier approval: Loan applications to traditional banks are not just denied due to poor credit. They can also be denied due to other factors, like self-employment. Private lenders are more likely to grant approval in these situations as long as you can demonstrate income, and/or have assets to use as collateral.
- More affordable than credit cards: While a personal loan from a private lender is typically more costly than one from a bank, they are typically cheaper than the most easily approved form of bank credit — credit cards.
- Consider the risks of obtaining a personal loan from a private lender. Like any financial decision, a careful consideration of the risks is absolutely essential before proceeding. Some of the major risks involved with obtaining credit from a private lender include:
- Loans from private lenders are more costly: This is the major risk. A private lender does not have access to cheap funds in the same way a bank does, which means loans are more costly. For example, a personal loan from a bank may cost 6% annually, whereas a private lender may have rates at 10% to 17%. This can lead to significantly higher costs over time.
- Payback periods may be shorter: Lenders may be less generous in terms of payback period, and as a result you may observe higher monthly payments in addition to steeper interest rates. This is because these lenders typically want a fast return on their investment.
- Consider whether you have collateral to secure a private loan. Private lenders such as businesses very often require borrowers to present collateral as a means to secure the loan. Securing a loan means that there is something of value that the private lender gains ownership and control over if the borrower does not pay of the loan.
- A deed of trust, along with a promissory note, are presented by a borrower as a means of providing collateral to secure a private loan.
- A deed of trust allows you to use real property, such as your home, as collateral to secure your obligations under the private loan.
- Trust deeds are always accompanied with a promissory note, which outlines the terms of the loan agreement and the amount of the private loan. The note is signed by the owner of the property underlying the deed, and contains a promise to repay the private loan.
- A third party, such as a broker or title company, acts as trustee to the deed and has legal ownership over the property/collateral. The trustee cannot control the property as long as the borrower fulfills his obligations under the loan agreement.
- If the borrower defaults, it is the trustee who has to power to sell the property and dispenses the proceeds to the lender.
- Trustees are not required on all private loans. For example, family or personal loans rarely have a trustee, although the lender may have to use courts to foreclose on collateral, depending upon terms of the loan.
A HUD auction is a form of foreclosure auction except the original lender was a federal agency instead of a private lender. The United States Department of Housing and Urban Development (HUD), is the insurer of loans made through a variety of government programs, particularly FHA loans. When a lender forecloses on a government insured loan, HUD...
S.F. ATKINS is a hard money lender and private mortgage investor that specializes in short term mortgage loans collateralized by real property. Since December 1999, Atkins has originated over $300 million of loans without suffering a loss and has experienced a default rate of less than 4%.