What Are the Disadvantages of Taking Out a Loan from Private Lenders?

The main disadvantages of a private or hard-money loan are a higher rate and upfront fees, a short term that ends with the whole balance due at once, and fewer federal borrower protections than a loan on your home. Two publicly traded hard-money lenders, Manhattan Bridge Capital and Sachem Capital, report typical fixed rates of 9% to 13%, upfront fees of up to 3% of the loan, and terms of one to three years in their annual reports for 2025. Freddie Mac's weekly average for a 30-year fixed-rate conventional loan (one without government backing) on a home the buyer will live in, for borrowers with good to excellent credit and about 20% down, was 7.32% for the week of October 22, 2026. The extra cost can be worth paying when you need to close faster than a bank can or want to buy a property in a condition conventional lenders will not finance.

Hard-money lenders are companies, other than banks and credit unions, that make short loans secured by real estate, mostly to investors. Non-bank mortgage companies that make conventional, FHA, and VA loans are a different group, compared in whether to use a bank or a non-bank lender.

What does a private loan cost?

Both lenders charge origination fees in points, each equal to 1% of the loan. Their 10-K filings list these standard terms:

Manhattan Bridge borrowers also pay the appraisal, title, recording, and legal costs, and Sachem's default rate, the higher rate charged once a loan is in default, can reach 24% a year. Manhattan Bridge requires the owners of a borrowing company to guarantee each loan personally, and Sachem usually takes extra collateral that can include personal guarantees, so you can owe the debt yourself even when your limited liability company (LLC) is the borrower. A loan capped at 70% or 75% of the value also means bringing the other 25% to 30% from your own cash or equity, plus fees. What lender fees include explains the origination charges on a standard mortgage.

Example, a $200,000 loan at 11% with 2 points, before appraisal, title, and legal costs:

• Fee at closing: $200,000 x 2% = $4,000.
• Interest-only payment: $200,000 x 11% / 12 = $1,833.33 a month, or $22,000 over 12 months.
• Cost for the year: $4,000 + $22,000 = $26,000, with the full $200,000 still owed at month 12.
• A six-month extension for 2 more points: $4,000 + $11,000 of interest = $15,000 more.

What happens when the balloon payment comes due?

Interest-only payments never reduce the balance, so the full principal is due on the maturity date as a balloon payment, and you repay it by selling the property, refinancing, or paying cash. Sachem's filing says it depends on the borrower's ability to refinance at maturity or sell the property. If you cannot pay, the lender decides whether to extend the loan or declare a default. Sachem says it may grant an extension if the borrower has complied with all the loan's terms and the loan meets its current lending standards, and after a foreclosure it may take ownership of the property.

If your plan is to refinance into a conventional loan sold to Fannie Mae, check two timing rules before you sign:

• A cash-out refinance, a larger new loan that pays off the old one and gives you the difference in cash, generally requires the mortgage being paid off to be at least 12 months old, measured from the date of its promissory note (your signed promise to repay) to the date of the new one. On a 12-month private loan, you meet that test only when the balloon is already due.
• Fannie Mae's delayed-financing exception, which allows a cash-out refinance within six months of buying, requires the purchase's settlement statement to show that no mortgage financing was used. It does not help if a private loan paid for the property.

Which federal protections do business-purpose loans skip?

Regulation Z, the federal Truth in Lending rule, protects consumer borrowers, those borrowing for personal, family, or household use, and does not cover credit made primarily for a business purpose. The lender decides the purpose of each loan. The rule's official commentary treats a loan to buy, improve, or maintain a rental property you do not live in as business credit, whatever the number of units, unless you expect to live there more than 14 days in the coming year. A loan to buy a rental building you will live in is also business credit if it has more than 2 units. On a business-purpose loan, you generally do not get:

• A Loan Estimate and Closing Disclosure. These standard federal forms show a consumer home loan's rate and closing costs, and the lender must send the Loan Estimate within 3 business days after your application. Without them, ask for the rate, points, default rate, prepayment terms, and extension terms in a written term sheet before you commit, along with any mortgage broker's fee.
• An ability-to-repay review. The federal ability-to-repay rule bars a lender from making a consumer home loan without a reasonable, good-faith determination that you can repay it. The rule also excludes temporary or bridge loans (short loans meant to be replaced by other financing) with terms of 12 months or less, so a 12-month private loan can fall outside it even on a home you live in.

The promissory note and the mortgage or deed of trust (the document pledging the property) set what happens on a default or an early payoff, so read those clauses before closing.

How do advance-fee scams target private borrowers?

Some scammers pose as private lenders and ask for money before the loan closes. The Federal Trade Commission (FTC) says real lenders can require an application or appraisal fee before they consider your application, but banks and other legitimate lenders will not promise or guarantee a loan before you apply. The FTC calls any upfront fee a lender wants before granting the loan, especially one labeled "insurance," "processing," or "paperwork," "a cue to walk away." Scammers often ask for payment by wire transfer, gift card, or cryptocurrency, which are hard to get back. Before sending money, ask your state attorney general or banking regulator, as the FTC advises, whether the lender is registered or licensed for the kind of loan you want. Report a scam at ReportFraud.ftc.gov.

When is a private loan worth the cost?

Private loans offer three advantages that can justify their price:

1. Speed. Manhattan Bridge calls its ability to approve and fund loans quickly its primary competitive advantage, and Sachem cites its ability to act quickly. A consumer loan on a home you will live in cannot close until at least 7 business days after the Loan Estimate is delivered or mailed and 3 business days after you receive the Closing Disclosure, unless you waive the wait in writing for a genuine personal financial emergency. Business-purpose loans have no federal waiting period, so the lender's own appraisal and title work set the timeline.
2. Approval based on the property. Sachem says its decision to fund a loan is primarily driven by its evaluation of the property's value, though it also pulls the borrower's credit report. How lenders evaluate properties covers what goes into that value.
3. Properties that need work. Fannie Mae will not buy a loan on a home rated C6, its rating for damage or deferred maintenance that affects safety, soundness, or structural integrity, until repairs bring it to at least C5, the next rating up. Both hard-money lenders fund renovation projects, up to 85% of total project cost at Sachem.

A private loan is worth its cost only when the gain from closing fast or buying a property that needs work is larger than the fees, interest, and extension costs through the date you can realistically repay. A flip priced from recent comparable sales, a purchase with a closing deadline a bank cannot meet, or a short bridge until the property qualifies for a conventional refinance can meet that test.

If you will live in the home (1 to 4 units) or are buying a 1-unit rental, price Fannie Mae's HomeStyle Renovation mortgage first. This conventional loan covers the purchase and the repairs together, with renovation costs on a purchase of up to 75% of the lesser of the purchase price plus renovation costs or the appraiser's "as completed" value after the work (50% of that value for a manufactured home), and you must meet Fannie Mae's standard borrower requirements. Then compare the offers using how to choose a mortgage lender.