Lending Guide: Getting Started

Why Private Money Costs More Than Banks

Financing from a hard money or private money lender costs more. Here’s why:

  • There’s usually a good reason a bank is unable to finance a loan. You may need too much money, have bad credit or need the money too quickly, among many other reasons. Taking on loans that can’t be financed through traditional banks means more risk to private money lenders. This greater risk is why private money costs more than banks.
  • Banks are your big-box store; private lenders are your local small business. Small businesses tend to have higher operating costs because they don’t have access to the economy of scale.
  • Most private lenders offer a higher level of customer service and flexibility that the one-size-fits all bank can’t provide. However, that additional service and flexibility comes with – you guessed it – cost.

Regardless, it’s important to remember that unlike with most banks, it’s possible to negotiate your terms and get financing even if you’re missing common criteria.While private money costs more, it also comes with many additional advantages.

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Why can’t I just go to a traditional bank to get my deal done?

Banks and private money lenders are not in competition with each other. Typically, if a bank can meet your needs, that’s where you should go. Private lenders exist to fill the gap when banks can’t meet your requirements, or your can’t meet theirs.

Banks generally require both strong collateral and a proven history of excellent credit and cash flow. Further, banking institutions may not provide the dual-combination of speed of capital and quick decision making.

Hard money lenders and private money lenders are the opposite of banks. They offer more flexibility, focus primarily on the collateral for your loan, and have the ability to fund a loan quickly. All of these may prove to be a major benefit when you’re in the midst of closing a difficult and time-sensitive real estate deal.

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