Private money refers to loans provided by sources other than banks. This loan option is used by real estate investors, small business owners, and people with bad credit. Lenders have toughened loan approval criteria, which can make it difficult to obtain business financing, home loans, or funds for investment purposes. Private financing sources can provide funds where traditional lending sources cannot.
Private money loans can be obtained from a variety of sources. People often turn to family or friends for short-term financing and small loans. Cash advance companies offer money for a week or two or provide a lump sum cash to purchase structured settlement annuities or probate property.
Funding sources provide private funds to business owners and investors. People who need large sums of money to buy a home or finance businesses turn to hard money lenders who are often private investors or investment groups.
Private loans generally require less paperwork than applying for mortgages or business financing through banks or credit unions. Funding sources focus more on the expected return on investment than on the creditworthiness of borrowers. The type of financial records required by the funding source will depend on the collateral used to secure the note.
When the loans come from family or friends, they must be documented with a promissory note. Although many people feel uncomfortable asking a relative to sign a financial contract, promissory notes ensure that both parties know that the funds provided are a loan and not a gift. This simple contract can help prevent misunderstandings and family disputes.
The promissory notes record the loan amount, interest rate, payment dates, and any action that would be taken if the funds are not repaid. The promissory notes are a legally binding contract that can be filed in court if the borrowers default on their agreement.
People who get private money loans to buy a house must provide financial records and real estate contracts. Most lenders require payment records, along with real estate appraisals and record of deeds.
Business owners who obtain private funds for their business are typically required to provide inventory assessments, corporate tax returns, profit and loss statements, business licenses, and insurance contracts.
Private lenders are required to comply with their states’ usury laws regarding the amount of interest assessed against the loan. Funding sources assume substantial risk when they provide financing to high-risk borrowers or for investment purposes. Almost all private financing sources will charge the highest interest rate legally allowed.
Finding private lenders is not difficult. The Internet can be a good source for locating reputable funding sources. Investment networking groups and online real estate clubs can provide referrals and share experiences. Borrowers can not only locate suitable private money lenders, but also find out who to avoid.
It is best to retain the services of a qualified attorney when entering into private money loan contracts. Some states limit the number of loans that private lenders can offer before they are required to become a licensed lender. To reduce financial liability, it is crucial that borrowers undertake due diligence to ensure that their private money lender complies with state laws.