What Are Private Lenders?
A private lender can be an organization, a group or an individual not affiliated with a financial institution. Private lenders may fund real estate loans, personal loans, educational loans and business loans.
Because traditional mortgage lenders are federally regulated, their application processes tend to be more formal and stricter with requirements for approval. Some choose private lenders because their lending criteria and processes can be quicker and can offer more flexibility.
Private lenders are not entirely unregulated; they still have to comply with banking laws and usury laws of the states in which they operate. However, these lenders may offer higher interest rates and fees and shorter loan terms than traditional financial institutions.
If you are hesitant to apply for a loan from a traditional lender because of your credit score or credit history, or because you don’t meet the typical employment requirements, a private lender may be the solution. That said, proceed with caution and vet the lender thoroughly.
>> Related: Learn more about where to get a personal loan.
How Do Private Lenders Loan Work?
At a glance, private lender loans are similar to loans from traditional lenders such as credit unions or banks, with private lender loans often being simpler and easier to apply for.
To secure a private loan, you’ll first need to thoroughly research a private lender and choose one based on your specific loan needs. You can prequalify with multiple lenders without having it affect your credit score. You’ll likely need some basic financial and personal information such as a valid form of identification, proof of income and documents to support your creditworthiness.
Private lenders often evaluate applications on a personal, case-by-case basis and can sometimes be more lenient and offer more personalized solutions than traditional lenders. They may or may not require you to put up some form of collateral as part of the loan agreement, but sometimes, the presence of collateral can get you more favorable loan terms.
The flexibility and personalized nature of private lender loans compared to traditional mortgages can appeal to many people.
>> Related: Learn more about the best unsecured personal loans.
Pros and Cons of Private Lenders
There are both advantages and disadvantages to using private money loans. Consider the pros and cons before applying to a private lender.
Pros
Because private lending is more flexible, the process is often faster.
If you have a nontraditional work history, bad credit or no credit history, a private lender may fund your loan based on other factors, such as your education or income.
Cons
Private lenders often charge higher interest rates.
Private loans are typically short-term, so you’ll need to pay your loan back quickly.
Finding the right private lender can take more time than choosing a bank or credit union with multiple locations.
How To Find Private Lenders
Searching for and choosing a private lender may take longer than applying for a loan with a traditional lender. To find a private lender that suits your needs, you can start your search via various online platforms and networks designed for connecting borrowers with private lenders.
Once you’ve picked a few private lenders to consider, ask yourself the following questions to find the best one for you:
- What are their requirements for a loan?
- Have they offered private loans before?
- How do I know this lender? Who referred me/how did I find the lender?
- How much is the loan amount (principal)?
- What is the interest rate?
- How often will I need to make payments?
- Are there any additional payments, e.g., a balloon payment in which the total balance due must be paid after a certain time?
- Are there any fees?
- What is the repayment term?
- What do I think about this private lender?
- Is this lender easy to work with?
If you choose a private lending company, look into customer reviews, credentials, past performance and types of loans offered. Some companies may have stellar reviews for certain types of loans and not-so-great reviews for others. SoFi, Upstart and Upgrade are popular options for private loans.
If you get a loan from a colleague, family member or friend, your search may be much shorter — but you should still evaluate your chosen lender before finalizing your deal. Make sure you’re on the same page regarding expectations, interest rates and payments.
>> Related: Learn more about the best banks for personal loans.
Alternatives to Private Lender Loans
If a private lender loan isn’t the best financial solution for you or you’re having difficulty finding the right fit, there are numerous alternative options to explore.
- Peer-to-peer (P2P) lenders: These lenders are similar to private lenders, but rather than fund someone directly, they pool their money together with other anonymous investors to fund loans. The application, approval and funding process can be as quick as private lending, but rates and borrower requirements may vary. Not all P2P lenders do business in every state, so be sure that your chosen lender operates legally in your state.
- Bank and credit unions: Traditional financial institutions have increased regulations and established lending guidelines, making your loan less risky and better protected. Your interest rate likely won’t be as high, and you’ll have more time to repay your loan. Credit unions typically charge lower interest rates for loans than banks.
- Community-based lending options: Assistance programs and government-backed loans are other possible options, depending on your needs and qualifications. There are government-backed student loans for higher education needs, FHA loans for first-time homebuyers and small business loans from the Small Business Administration. Numerous community assistance programs can help you secure affordable housing, pay for your heating and cooling utilities, obtain groceries and more.
The Bottom Line
A private lender can be a suitable alternative to a traditional loan. The application and qualification process for a private lender loan may be more informal, as well as quicker and more personalized. Those who may not qualify for a traditional loan may also may have more success securing a loan from a private lender.
Carefully evaluate each private lender you consider and go through the prequalification process to see what rates and terms you might be offered. Pick a lender who offers satisfactory loan terms, including your interest rate, loan repayment term, principal and frequency of payments.
Private lender loans are not for everyone. If you’re unsure about getting a private loan, consider a loan from a financial institution or peer-to-peer lending network. You may qualify for a government-backed loan or assistance program as well.
Frequently Asked Questions About Private Lender Loans
There are four types of private lenders: a private individual, a private fund or firm, a peer-to-peer lending network, and an online lender.
A private individual lender can be a family member, friend, colleague or acquaintance. A private fund or firm is an organization that invests in their chosen projects. A P2P lending network pools money between individual lenders through an online platform. An online lender is a private lending company that operates virtually.
Private money lending can be risky for both borrowers and lenders. Higher interest rates and shorter loan terms can make it more difficult for you to manage your repayments. Private lender loans are also less regulated and can come with less consumer protection and higher fees.
That depends on the private lender you choose. Some online lenders will work with you if poor or fair credit, which ranges from 579 to 669.
The easiest personal loans include payday loans, no-credit-check loans and pawnshop loans. These loans have minimal to no approval requirements, however, they may charge the highest interest rates and fees.
Editor’s Note: Before making significant financial decisions, consider reviewing your options with someoneyou trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.
If you have feedback or questions about this article, please email the MarketWatch Guides team at [email protected].
