Pros and Cons of Private Money Lending

A man is holding a stack of cash, representing private money lending.

Money funding is available in many forms in Canada. If you need money for a house or to fund your business, you have a lot of options. You can either get a loan from a well-known institution like a bank, or you can consider private money lending. If you tried getting money from a bank and you were turned down, then a private money lender like Alpine Credits can help you out.

Private money lending is useful, but it does come with its cons? In this article, we are going to take a look at the pros and cons of this practice. 

Private Money Lending Pros

Perhaps you were planning to buy your first home, or you needed some money for an emergency, but you didn’t have any. A private money lender can be the best solution, especially if banks are hesitant to grant you a loan. Let’s see the benefits that a private money lender can offer you. 

Easier to Qualify

If you don’t have the best credit score, the chances are that banks will refuse your loan application. They don’t want to take the risk, and they prefer to give you no money at all. So, what do you do if you have an emergency? 

Thankfully for people with bad credits, qualifying for a loan from a private lender is much easier compared to being eligible for a bank loan. Especially when it comes to getting a private mortgage, the lenders are looking more at the property rather than who requests the loan. So, they will care about whether the house you are going to fund seems profitable. 

Even better, if you are self-employed and don’t have the necessary documents to prove your income, you will be accepted by private lenders. Meanwhile, traditional lenders are less likely to give you a mortgage if you are self-employed. 

The Application Is Fast

Usually, when you take a loan from a private lender, you will not have to wait for ages for your application to be reviewed and accepted. Whereas a traditional mortgage will take about a month to give you the approval, private ones will not put you through the same process. Thus, you can have faith that you will get your money much faster this way, and you’ll be able to buy your house before it’s too late. 

If you need a loan for an emergency, such as medical care or treatment, the fact that the approval process is faster will be of great help. 

You Can Get Mortgages to Fund Properties that Need Fixing

Are you looking to purchase multiple properties that will need reparations before reselling them? It can be pretty expensive, but a private lender can help you with this. Basically, a private mortgage lender would be willing to give you money for such a project, especially if the property would have big returns afterwards. 

Of course, first, you need to make sure that the property you want to buy can indeed generate great returns before you request a loan. 

Cons of Private Money Lending

As already mentioned, private money lending also has its downsides. So, if you read the advantages and you were already convinced to get one, it’s best to know the drawbacks as well. 

High Interest Rates

What usually makes loans so annoying to deal with is the interest rate. On top of the amount you have to pay back monthly, you also have the interest rate, so you’ll pay more than the amount you took. This is even worse with private lending. 

For example, a private mortgage lender offers money to people who want to buy a home and then gets money from the interest a client pays. Unlike a conventional money lender, a private one is not regulated by loan boards. As such, the interest rates can get very high, which means you’ll pay even more than you would with a bank loan. If you don’t have a high income, to begin with, or if your property is not that profitable, things can get quite trickier for you. 

You Have to Pay It Back Quickly

Usually, a traditional mortgage loan would have to be paid back in up to 30 years, so you have enough time to give back what you owe. You pay a certain instalment every month until you can reach the total sum. 

But with private mortgage loans, you have to repay the amount in less time. Sometimes, this can be as soon as two years, or even less. Because private lenders want a quick return, their loan terms are much shorter. It’s even worse when you think that the interest rate is so high. 

Anyone interested in private money lending should first make sure they read all the terms of the lender they take money from. Also, they should ensure they will be able to repay the loan in a short amount of time. 

Pre-Payment Penalties

You are probably tempted to pay back your private mortgage early, especially if you somehow recover the amount you borrowed and have enough to pay your whole debt. However, some private lenders will have pre-payment penalties, so you will be penalised if you attempt to pay back a huge chunk of your debt at once. Before you do this, you should check whether the lender has such penalties – if that’s the case, you should refrain from paying a huge amount back early. 

The Bottom Line

Private money lending can be very convenient, especially if you were refused by traditional lenders like banks. Fortunately, a private lender is more willing to give you a loan, and they will not look at your credit score either. You can even get one if you’re self-employed. However, the interest rates might get very high, and you also have to repay your loan much faster. Before you attempt to request a private loan, you should make sure you are re ready to deal with everything it involves. Always read the terms of the lender early on.

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