Financing a new property can be overwhelming. If you're looking for an alternative to traditional lending, a private money loan may be the right choice for you. Let’s take a look at what private money loans are and where you can get them, dive into when they're the right financial fit, and discuss the advantages and disadvantages of taking one out.
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Private Money Loan: the Basics
Private money loans, or hard money loans, are typically short-term loans that are secured by real estate. Private money loans are most often funded by private investors or lending companies and, while they're fairly uncommon, they can be a necessary bridge between major purchases. Unlike traditional loans, a private money loan is backed by a hard asset, such as real estate, to be used as collateral, as opposed to a credit score. Due to the nature of these loans and their lenders, you'll often find more lenient lending rules here than with traditional bank loans.
Private money loans can be used for a variety of purposes, including:
- Buying a home
- Investing in rental properties
- Investing in commercial real estate
- Funding business ventures
- Financing construction or renovation projects
Advantages of a Private Money Loan
Private money loans offer several advantages. For instance, if you're looking to flip a residential property, a private money loan can provide you necessary liquid funds to fuel your short-term project, which will likely sell for markedly more money. Plus, more lenient eligibility criteria than conventional bank loans makes it possible to secure financing for real estate investment projects that may not meet the strict requirements of traditional lenders.
If you're in a time crunch, private money loans might be a great solution for you. They are often approved and closed much faster than traditional loans, making them favorable for time-sensitive real estate transactions. These kinds of loans also often have higher loan-to-value ratios, meaning that the loan amount is often greater than the value of the asset used as collateral.
Disadvantages of a Private Money Loan
There are some disadvantages to taking out a private money loan to be aware of. These loans often come with higher interest rates than traditional loans. This means that the total cost of the loan may be higher in the long run. Private money loans also often have shorter loan terms than traditional loans, one to three years compared to a thirty-year mortgage. This results in an ultimately higher loan cost in the short term because it needs to be paid off significantly quicker. The high-interest rates and short repayment terms make them less favorable for long-term financing.
Additionally, the terms of a private money loan are typically more rigid than a conventional loan, meaning that the borrower must adhere to the terms of the loan. Without adherence to the terms, borrowers run the risk of losing the collateral property should the loan default.
How to Know if a Private Money Loan is Right for You
Ultimately, weighing the pros and cons of a private money loan is important before deciding if it's the right choice for you. If you're looking for quick financing for a real estate or business venture or can't qualify for a traditional loan, a private money loan might be the right choice. However, it's important to consider the high-interest rates and short loan terms associated with these kinds of loans before making your decision. If you're financing a short-term project, then a short-term solution is likely the right fit.
At SkyBeam Capital, we're committed to providing you with the best loan options for your real estate projects. If you're looking for an alternative to traditional lending, a private money loan might be the right choice for you. Contact our team today to learn more about our loan options and whether a private money loan might be the right choice for you.
