Private Lenders vs Banks

Private Lenders vs Banks

September 14, 2023

Produced by:
Carmel Woodman

With over 8 years of expertise, Carmel brings a wealth of knowledge as the former Content Manager at a prominent online real estate platform. As a seasoned ghostwriter, she has crafted multiple in-depth Property Guides, exploring topics such as real estate acquisition and financing. Her portfolio boasts 200+ articles covering diverse real estate subjects, ranging from blockchain to market trends and investment strategies.

Short Summary of Key Differences

While private lenders and traditional banks both provide financing to borrowers, there are some major differences between the two that make them good for different purposes. Here are the main differences that could impact your decision:

  • Regulations: While traditional banks are heavily regulated by government agencies in terms of consumer protection, private lenders are not regulated the same way. Instead, they are only bound by certain rules for lenders, and not heavily regulated.
  • Loan Process & Criteria: The speed of approval for bank loans versus private loans, as well the approval criteria, are another point of difference. Bank loans typically have a slower loan process with more stringent lending criteria with importance being placed on credit history. While private loans have a much faster loan process and less stringent lending criteria.
  • Loan Terms: Bank loan terms are structured and formalized, while private lenders offer more flexible loan terms that can often be customized to each borrower’s situation.
  • Interest Rates: Bank loans often have lower interest rates because there is a lower risk for them. While private lenders have higher interest rates, due to the nature of the loans they provide being riskier.
Banks Private Lenders
Heavily regulated by government agencies Only certain lending rules apply
Stringent lending criteria Less stringent lending criteria
Slower loan approval process Faster loan approval process
Lower interest rates Higher interest rates
Structured, formalized loan terms Flexible loan terms
Financial institution Individuals or groups
Formal borrower relationship Personal borrower relationship

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What Are Private Lenders?

Investing in real estate is one of the most successful wealth building strategies. One of the key decisions impacting the success of these investments is the choice around financing. Private lenders are a good option for those who don’t want to use traditional lenders or can’t qualify for traditional loans.

Private money lenders are individuals, not tied to any bank or financial institution, who provide funds for various purposes. It’s essentially an investment opportunity for an individual or a group of people who are looking to earn a return on their investment.

Private lenders aren’t bound to the same rules and regulations as traditional lenders, which means that they can offer more flexible loan terms and they can lend to whoever they choose. However, they are still bound to certain laws and regulations around lending, which protect both the private lender and the borrower from fraud and other issues.

Bear in mind that private lenders will often require the property to be collateral for the loan, in the event that the borrower cannot repay their loan and the lender needs to recoup losses on the investment. Private lenders may also charge a higher interest rate on their loans, to mitigate the larger risk they are taking.


Private Lender Definition

Private lenders are individuals or non-institutional entities that provide loans to borrowers, typically for various purposes, such as real estate investments, small business financing, personal loans, or other ventures. These lenders are not traditional financial institutions like traditional banks or credit unions. Instead, they are private individuals, groups, or organizations that have the capital and willingness to lend it to others in exchange for interest or other financial benefits.

Why Real Estate Investors Use Private Lenders

Real estate investors are one of the key groups of people that use private lenders to fund their property purchases. Private lenders can offer real estate investors a financial solution that they wouldn’t be able to get elsewhere, and here’s why…

  • Flexible Terms: By nature, private lenders aren’t bound to strict lending rules and can therefore offer flexible loan terms to borrowers, based on their own criteria. This opens the door for borrowers to enjoy loan terms based on their unique situation, instead of having to fit in with predetermined loan terms. For real estate investors, this is a major perk, and can help them secure real estate deals that they otherwise wouldn’t have been able to.
  • Easier Approval: Private lenders can determine their own lending criteria, which means that they can essentially provide loans to whoever they want. This works well for real estate investors who may not qualify for other types of loans, but who have found a great real estate deal. If the deal is good, private lenders are likely to provide the loan, regardless of the borrower’s credit score and financial history.
  • Fast loan Closing: One of the most important factors for real estate investors is closing a loan quickly, to beat the competition. When it comes to private lending, loan closing can be as fast as the lender chooses. Which means that real estate investors can close private loans in a matter of days, instead of having to wait weeks for other loans.
  • Non-Traditional Properties: Private lenders may be more willing to finance non-traditional or distressed properties that traditional lenders might consider too risky. This opens the door for many investment opportunities to be funded.
  • Relationship-Based Lending: Building a strong relationship with a private lender can lead to ongoing financing opportunities. Successful real estate investors often cultivate relationships with a network of private lenders for future projects.
  • Bridge Loans: Sometimes real estate investors need to secure financing for a property purchase very quickly, before they commit to a long-term loan with a traditional lender. Using a private lender for bridge loans can be the difference between missing out on a great real estate deal or not. As such, this is a very important function for real estate investors.
Real estate

Key Differences Between Private Lenders and Banks

Private lenders and traditional banks are quite different when it comes to lending funds, and these differences are important to note, particularly for real estate investors. Let’s take a closer look at the key differences, so that you can make a more informed decision between the two.

Lender Type

Private lenders are usually individuals or groups who are not a formal institution. They will often lend their own money, or funds from private investors. Whereas banks are traditional financial institutions that are highly regulated and offer a wide range of financial services and can be a bank or credit union.


Private lenders are not bound by the same regulations as traditional banks, because they aren’t associated with an institution. While banks are regulated heavily by government agencies to ensure adequate consumer protection, private lenders are only governed by a few guidelines that apply to lenders.


The approval criteria and speed are some of the biggest differences between banks and private lenders. On one hand, private lenders can offer fast closing on loans as they have less admin and “red tape” around providing loans. Their application criteria are also less stringent than traditional lenders, and this opens the door for those with lower credit scores or a less-than-perfect financial history to find the funding they need.

Banks typically have a more structured and time-consuming approval process, which can result in longer wait times for loan approval and disbursement. They also have strict lending criteria which can be prohibitive for many borrowers, particularly real estate investors who need fast, easy funding.

Loan Terms

Private lenders can offer more flexible loan terms, and they may even be open to negotiating. In the world of real estate investment, this can be a valuable tool for investors to get access to a loan that is structured to suit their investing needs.

Banks, on the other hand, have standardized loan products with fixed terms and conditions, such as a 30-year fixed rate mortgage loan. Which means that there is no wiggle room, and borrowers have to fit in with the terms that the bank outlines.

Interest rates

Private lenders usually charge higher interest rates than banks. This is due to the risk that they are taking on when they provide loans, particularly to those with a less established credit history.

Banks have lower interest rates than private lenders most of the time. This is because they have access to lower-cost funds, and they have the ability to spread risk across a large customer base.


Private lenders take on a high risk when they lend funds. So, they typically require some sort of collateral, to mitigate this risk. In the case of real estate investors, the property itself may be used as collateral to secure the loan in case the borrower cannot repay it.

Banks require collateral for a mortgage loan too, but there are various ways of providing this collateral. In some cases, a bank may not require a large amount of collateral, it depends on the loan type. However, loans are secured in a more structured way.

Customer Relationship

Private lenders have a more direct and personal relationship with their borrowers, as borrowers are dealing directly with the lender. This means that borrowers can grow this relationship and create a long-term partnership, as well as negotiate more customized loan terms.

However, banks don’t offer the same relationship with borrowers. They have a formalized and structured approach to customer relationships because they have so many borrowers to deal with.

Loan documents

Key Similarities Between Private Lenders And Banks

While private lenders and banks have a vast number of differences, there are also a few key similarities between the two.

Provide financing: Both banks and private lenders provide financing, this is the key similarity between the two. At their core, both parties provide loans to individuals, businesses and investors.

Charge interest: Both private lenders and banks charge interest on the loans they provide, even though one may charge higher rates than the other. Interest rates can vary based on the type of loan, prevailing market conditions, and the borrower’s creditworthiness.

Loan collateral or security: Banks and private lenders both require some form of collateral to secure the loans. Whether that is in the form of a down payment, or using real estate as collateral, banks and private lenders both need to secure the loans.

Loan repayment: Banks and private lenders both require loans to be repaid in installments (or otherwise) over a period of time. In both cases, borrowers need to repay the principal amount borrowed along with interest. The specific repayment terms vary depending on the loan agreement.

Regulations: While the extent of regulation differs, both private lenders and banks are subject to some level of oversight and legal requirements.

Why Don't More Banks Offer Investment Property Loans?

Banks generally don’t like investment properties for a few reasons that all stem from risk. Investment properties are generally more risky than primary residences for a traditional bank, because there are usually tenants renting these out and borrowers use the rental income to repay their mortgage loan. However, this leaves borrowers at the mercy of their tenants, and if the tenants don’t pay their rent, the borrowers may struggle to repay their loan.

Banks prefer properties where there is more equity from the borrower invested in the loan. Typically, a real estate investor will be trying to purchase an investment property with as little capital of their own as possible. Banks are essentially just trying to avoid losing money on a property and having to foreclose on it.

Banks are wise to the fact that an investor’s ability to repay the bank loan hinges on their cash flow. This is a big risk for a traditional bank, because the investor’s cash flow is variable and could easily be different one month, which could lead to a default on their monthly payment.

It all boils down to risk, and when it comes to real estate investment, a traditional bank or credit union is likely to view the deal as risky. Which means that they steer clear of these loans where possible and focus rather on safer loan alternatives.

Investment property

How To Apply For A Private Money Loan

Private loans are offered by private lenders, such as New Silver, who can be a great resource for a real estate investor. For investors who are considering applying for private loans instead of bank loans, here’s some useful advice…

Step 1: Figure out your finances

The first step on your journey to acquiring private loans is to figure out how much money you’ll need and what the purpose of the loan is. Whether it’s a fix and flip property or a rental investment, get your financial ducks in a row before you even begin looking for private lenders, so that you know how much you need and what your expenses will be.

Step 2: Find a private lender

Finding private mortgage lenders is often done by building a valuable network of individuals, real estate investment groups, or other non-institutional sources. You can also attend local real estate investor meetings, join online groups or forums and consult real estate professionals for referrals. Make sure that the private lender you choose offers the loan terms and requirements that suit your financial and investment needs.

Step 3: Prepare a plan

The next step is to present private mortgage lenders with your plan, which can take the form of a business plan or simply a proposal. Either way, this plan needs to outline your project and its potential returns, as well as show the private lender in detail how the funds will be used. This plan needs to include a clear strategy of how the loan will be repaid.

Step 4: Discuss the loan terms

Next you will need to negotiate the terms of the loan with the private lender, which includes the loan amount, interest rate, repayment schedule, and any collateral or guarantees you are willing to provide. Be prepared to discuss the exit strategy, which outlines how you plan to repay the loan in a hurry, such as a property sale, refinance, or another strategy.

Step 5: Complete the loan application

Each private lender will have their own loan application or documentation which needs to be filled out. Make sure that you understand exactly what information is needed and provide all the documents and financial information required. These may include your credit history, assets and liabilities and more. Once this has been done, you can present your proposal to the private lender.

Step 6: Due diligence

Private mortgage lenders will then conduct their own due diligence and do background checks. They will need to evaluate the potential investment and assess whether you can pay the loan back or not. Be prepared to provide additional documentation or answer questions about your project.

Step 7: Finalize the loan

The final terms of the loan are finalized once both parties agree on the terms and conditions, and then the loan will close. Loan closing with a private lender typically involves signing the loan agreement and other necessary documents. Ensure all legal requirements are met and consider involving legal professionals to review the documentation.