Private money refers to loans provided from sources other than banks. This lending option is used by real estate investors, small business owners, and individuals with poor credit. Lenders have tightened loan approval criteria which can make it challenging to obtain business financing, home loans, or funds for investment purposes. Private funding sources can provide funds when traditional lending sources will not.
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 lump sum cash to purchase structured settlement annuities or probated inheritance property.
Funding sources provide private funds to business owners and investors. Individuals who require large sums of money to buy a house or fund businesses turn to hard money lenders which are oftentimes private investors or investment groups.
Private loans usually require less paperwork than applying for mortgages or business financing through banks or credit unions. Funding sources focus more on their anticipated return on investment than borrowers’ creditworthiness. The type of financial records required by the funding source will depend on the collateral used to secure the note.
When loans are provided from family or friends they should be documented with a promissory note. While many people feel uncomfortable asking relatives to sign a financial contract, promissory notes ensure both parties are aware that the funds provided are a loan and not a gift. This simple contract can help prevent misunderstandings and family disputes.
Promissory notes record the amount of the loan, rate of interest, payment dates, and any action which would be taken if funds are not repaid. Promissory notes are a legally binding contract which can be submitted to court if borrowers default on their agreement.
Individuals who obtain private money loans to buy a house must provide financial records and real estate contracts. Most lenders require pay records, along with real estate appraisals and record of deed.
Business owners who obtain private funds for their company are usually required to provide inventory appraisals, corporate tax returns, profit and loss statements, business licenses and insurance contracts.
Private lenders are required to abide by their states’ usury laws in regard to the amount of interest assessed against the loan. Funding sources assume substantial risk when providing financing to high-risk borrowers or for investment purposes. Nearly every private funding source will charge the highest interest rate legally allowed.
Finding private lenders isn’t 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. Not only can borrowers locate suitable private money lenders they can also discover who should be avoided.
It is best to retain the services of a qualified lawyer when entering into private money lending contracts. Some states limit the number of loans private lenders can offer before being required to become a licensed lender. In order to reduce financial liability it is crucial for borrowers to engage in due diligence to ensure their private money lender complies with state laws.