Private Money

What Is Private Money?

Private money refers to lending money to a company or individual by a private individual or organization. Unlike traditional sources of financing (such as banks), private money is offered by individuals or organizations and may have non-traditional qualifying criteria. It can be a solution when conventional funding are not available.

Here are some key points about private money lending:

  1. Definition: Private money lending occurs when a wealthy individual or private organization loans money to a person or company. It is commonly used in real estate investment, where private money lenders provide funds to investors who purchase and often renovate properties for resale or rental purposes3.
  2. Characteristics:
    • Flexibility: Private money lending is less regulated and more flexible than lending by licensed lenders such as banks.
    • Lenders: Private money lenders can be family members, friends, or private organizations (not traditional banks).
    • Interest Rates: Interest rates on private money loans tend to be higher (typically 15% to 20%) than loans from licensed lenders.
    • Loan Terms: Terms are often short (6 to 12 months) but can extend up to five years.
    • Collateral: Loans are often secured by the property being financed.
    • Usury Laws: Private money lenders must follow state usury laws that limit the interest charged3.
  3. Qualification Criteria:
    • Lenders focus on whether a specific deal makes financial sense rather than solely relying on the borrower’s credit history.
    • A written plan describing how the money will be spent is often required.
  4. Comparison to Hard Money Lending:
    • Private money lending is similar to hard money lending, both used in real estate investing.
    • Hard money lending is more similar to mainstream lending (like bank loans), while private money lending is often more like friends-and-family financing.
  5. Pros of Private Money Lending:

Remember that private money lending provides an alternative financing option, especially when traditional lenders may not meet specific needs.