How Much Do Private Lenders Charge? Private Lending Rates Guide

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Quick Summary: What interest rate do private lenders charge?

Generally speaking, private lenders will charge between 6-15%, but this depends on the purpose of the loan, the length of the loan, and the relationship between the borrower and the lender.

For instance, it is entirely possible for a parent, close friend, or business acquaintance to act as a private lender. In this scenario, a private loan could be set with favorable terms for the borrower, including low interest rates and minimal penalties for late payments.

Intro

All mortgage lenders charge interest rates and fees – it’s how they can stay in the business of granting loans. Each private lender has different costs, so shopping around to find the best rates helps you save the most on your home financing needs.

Private lenders have the benefit of setting their terms, rates, and fees because they keep the loans themselves – they don’t have to answer to investors.

So what drives the fees and rates private lenders charge?

Let’s dive in.

How Are The Rates Calculated?

Interest rates are the fees lenders charge to loan you the money. You pay interest monthly until you pay the balance off in full. There’s no getting around paying interest – this is what allows private mortgage lender to continue writing loans.

But you can control the interest rate you get, as private lenders base your rates on a few factors including:

  • Your down payment – The more money you invest in the home, the less risk the lender takes. Lenders like it when you have ‘ skin in the game.’ Investing your money means you’ll be more likely to find a way to avoid defaulting on the loan, which allows lenders to give a lower interest rate. For example, a borrower with 40 percent invested in the home will likely get a lower rate than a borrower with 10 percent invested.
  • Your credit score – Lenders look closely at your credit history. Do you pay your bills on time? Are your credit card balances in control? Do you have a lot of collections or public records? The higher your credit score, the lower the rate lenders charge. Working on your credit before you apply for a loan may help lower your interest rate.
  • Your income and assets – The better your financial standing, the lower the interest rate. Lenders want steady income and enough assets on hand to back you up should your income stop suddenly. Prove that your income is steady, whether work-related income or investment income, and that you have months of mortgage payments on hand in a liquid account and you’ll have a better chance of securing a lower rate.
  • Origination Fee – Most private money lending businesses will charge an origination fee. This tends to range from 1.5% to 3% of the total loan amount. You can view New Silver’s origination fees here.

A private money lender will put all these pieces of the puzzle together when determining your individual interest rate and repayment plan. They don’t focus on one factor alone, but rather look at the big picture. For example, if you have a lower credit score, but have a lot of assets on hand, a large down payment, and steady income, you may still get a decent interest rate.

In addition, it is also worth clarifying that most private lenders will charge between 6-15% for residential loans specifically. If you put down a large deposit, have a good credit history, and opt for a 30-year repayment term, your interest will be closer to 6%. If you only put down the minimum deposit, have a bad credit history, and your repayment term is 24 months or less, your interest rate will probably be closer to 15%.

What Are The Benefits of Private Money Lending?

  • You can set very flexible loan terms
  • Require far less paperwork than a traditional bank
  • May have lower credit score requirements than a conventional lender
  • May be more likely to approve your request for funding
  • Tend to operate much faster than a traditional lender

How Does The Repayment Work?

Like a traditional loan, a monthly payment will be used to cover the interest portion of the loan. However, you might find that there is flexibility with the capital amount owed, which basically means you can potentially build in a balloon payment (paid at the end of the loan) that ranges from 0% to 100% of the capital borrowed. The final monthly installment amount will ultimately depend on how you structure the agreement with the lender.

What Points Do Private Lenders Charge?

Private lenders often charge origination points with a loan product. Origination points tend to range from 2 to 5 percent of the total loan amount. The final amount you will be charged depends on the type of loan and the loan term. The longer you borrow the money, the higher the risk lenders take, which means more points.

Like your interest rate, lenders look at your risk profile when setting the origination points. Great credit, a high down payment, or shorter-term means lenders are less likely to face default. They may charge fewer points in this situation.

Sometimes points include all fees and other times they are separate. Ask the lender about the fees and how they’re broken down so you fully understand the loan ‘s costs.

Are There Other Fees?

Other parties are involved in the loan process, and they have fees too. Look closely at your loan documents to see what other costs you’re paying.

A few examples include an appraisal fee, title search, title insurance, notary, recording, and closing fee. These services are necessary to complete the loan process.

Shopping For Private Lender Fees

Make sure you know all the fees a lender charges. Ask for a loan estimate which details the cost of the loan, allowing you to complete an apples to apples comparison of each loan.

Look at the big picture too. If a lender charges more fees, it may be to give you a lower interest rate. How does it work out for you in the end? Look at the loan ‘s total costs rather than focusing on just one factor to get the full picture of what private lenders will charge you for a loan.

What’s The Difference Between A Private Money Loan and a Hard Money Loan?

The biggest difference between a private money loan and a hard money loan is that private lenders tend to operate as individuals, whereas hard money lenders operate as a public business. The table below further clarifies the differences:

Private Money Lender

  • Lend Money As An Individual
  • Often lend money for real estate, but can also fund start-ups and other projects
  • Tend to avoid advertising
  • Can be much harder to find than a hard money lender
  • Often require interpersonal networking in order to access
  • Can offer very flexible repayment terms

Hard Money Lender

  • Lend Money As A Business
  • Usually have a minimum credit score for all borrowers
  • Evaluate your ability to make the monthly payment
  • Used to fund real estate projects like house flips and buy-and-hold investment properties
  • Often work with interest-only repayments
  • Require you to pay back the full loan amount at the end of the loan terms
  • Operate like a bank, but with much more flexible terms, and far less paperwork/administration
  • Will advertise their services like a normal business

While the differences indicated above apply in most cases, it’s worth clarifying that both private lenders and hard money lenders need to comply with all the legalities involved when lending someone money. If you have any doubts about the legitimacy of the lender, one of the safest options is to choose a company that is approved by the American Association of Private Lenders, like New Silver.