What are private loans?
The phrase “private loans” refers to money that does not come from a bank or institutional lender. Instead, the money for the loans is from the private lender. In some cases, a private lender might be a business partner or even a family member to a borrower. However, that is not always true; there are times private lenders are actual companies, for example, private investment firms, which can use their money to fund various projects and investments. Private loans are usually given to people who wish to borrow money but don’t meet the qualification guidelines and criteria set by a bank.
In the world of Investment Property, private loans are a source of money for a real estate property. Private loans are a critical component of the real estate investment because it allows for the presence of average investors by giving them an avenue to get funding through private lenders.
Benefits of Private Loans
There are two benefits for the private lender. Firstly, it would generate an income passively. The private lender won’t need to do the heavy lifting in finding or supervising the property. As an alternative to work, you just have to provide the funding and let the borrower do the work while waiting until the investment returns. Secondly, the interest percentages for private loans are higher than in traditional bank loans, so that you can expect a significant profit from your investment.
Borrowers would also experience benefits with private loans. The most significant benefit for the borrower is the added flexibility in the approval guidelines and criteria, and loan terms. Private lenders would even consider looking at cases that have failed to meet criteria or had been rejected by banks.
Risks of Private Loans
Private loans are just like any other form of loan in that there are risks involved for both parties. A great risk for private lenders is the lack of guarantee of investment returns because of the possibility that the borrower might fail in his endeavours. The venture could even fail dramatically, causing the private lender to lose his money. However, private loans often use the borrower’s property as collateral; it would still be on your shoulders to handle the foreclosure process, which would be very expensive and a waste of time.
The borrower would shoulder the most significant risk of asking for a private loan due to the high-interest percentage. The borrower could also possibly lose his home as collateral should he fail to accomplish the agreed-upon contract.
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Learn about Private Loan Eligibility here