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.
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.