Cons of Private Money Loans
Private money loans are very popular, particularly when we face banking problems. That being said, there are definite cons to private money loans and we take a look at them in this article.
First off, what is a private money loan? It is a loan made by a non-traditional lending source to a person or business in need of financing who cannot get it from traditional sources. In English, this essentially means that there are wealthy individuals who individually, or together, are willing to make loans that banks would not. Why are they willing to do this? Well, that brings us to our first negative aspect of private money.
When it comes to the cons of private money loans, the number one listed issue is the cost. A private money loan is usually being made under extenuating circumstances. Put another way, the borrower really needs the money. In turn, the wealthy lender is looking for a big rate of return. This combination means the borrower will be paying a lot more than he or she would on a traditional loan.
The exact cost of the loan is entirely negotiable. Typically, there are two or three issues that can arise. The lender will always want the borrower to pay points on the loan and lots of them. Your bank may have charged you a point and a half on a home mortgage. A private money loan might call for five points or more. The same increase will be found with interest rates. You can expect to pay in the teens – 10 percent or more. Making things even more taxing, the private money lender will often want some money up front to show that you are not completely broke.
Another con with private money loans has to do with time. The longer the term of a loan, the more risk that it will not be paid. Private money lenders are comfortable with risk, but not over long periods of time. This means that you may get approved for a loan, but it may only be good for three to five years. This means larger monthly payments unless you negotiate a balloon payment or some other option that lowers the monthly payments.
Given these cons, you might wonder why someone would go with a private money loan? There are many pros to private money loans as well. These include financing for tricky and complex situations; quick funding of the loan with application to money in the bank often being a matter of days, not weeks or months; and a willingness to take on risk where traditional banks will not.
People who go with private money loans often evaluate the situation not by looking at the cost of the loan, but by looking at what profit will be lost if they do not get the loan. If you are going to make millions on the development of a property, paying $25,000 in points is really not a big deal!
