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

Here are some disadvantages of taking out a loan from a private lender:

• High Interest Rates. Private lenders will typically charge a higher interest rate, around 12% or higher, compared to institutional lenders who offer conventional mortgages with rates that range from 4%–6%. Additionally, lender fees charged by private lenders sometimes can be as high as 10%. An independent appraisal and assessment for prepayment can also be charged to borrowers. Overall, the cost of borrowing from private lenders can be expensive.

• Short Repayment Period. Most private lenders require borrowers to repay their loans within a very short period, ranging from 1–3 years. A 3–6 month payback period is also common. Between a high monthly interest rate and brief repayment period, repaying a loan from a private lender may be difficult.

• Risk of Getting Cheated. Fake private lenders can rip off borrowers through a variety of scams and tricks. These fake lenders may induce borrowers to submit their personal information, leaving those borrowers susceptible to identity theft. They may trick borrowers into paying a processing fee before the loan process, after which the fake lenders will cease communicating with victims of this scam.

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While traditional lenders care more about your financial standing and corresponding ability to repay a mortgage, hard-money lenders are more concerned with the value of the property secured as the protection for their investment.