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.
Here are some key points about private money lending:
- 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 purposes.
- 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 charged.
- 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.
- 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.
- Pros of Private Money Lending:
- Flexibility: Borrower qualification guidelines are fewer and less strict.
- Distressed Properties: Private money lenders are more willing to finance distressed properties in need of significant repair.
- Speed: Borrowers can get funding quickly, often within days.
Remember that private money lending provides an alternative financing option, especially when traditional lenders may not meet specific needs.