Adam McCann, Financial Writer
@adam_mccann
Private lenders are entities that loan money to individuals or businesses but are not tied to any bank or credit union. A private lender could be an individual or it could be an entire company, such as LightStream or Best Egg. A private lender can fund many different varieties of loans, but two of the most common are real estate loans and personal loans.
Private lenders tend to have faster approval times than banks or credit unions, thanks to streamlined or informal application processes. Private lenders may also be more willing to work with people who have bad credit. Many online private lenders have minimum credit score requirements in the bad credit range. And individuals may not care all that much what your credit score is.
How Private Lenders Work
Loans from private lenders work just like loans from banks or credit unions. You receive funding to buy a property, make a purchase, consolidate debt, make home improvements or any number of other expenses. Then, you pay the amount you borrowed back in installments, with interest. That’s how the lender makes money.
Private Lending Companies
The first major type of private lender is a private lending company. Just like banks, these companies look to profit off of the interest you pay them. When it comes to personal loans, companies referred to as “online lenders” are private lenders that conduct all of their business over the internet.
Some notable private lenders include:
Individual Private Lenders
The second big type of private lender is an individual. Individual private lenders can be investors who are looking to earn money through the interest borrowers pay on loans. This may get them a better return than leaving their money in the bank would. Individual private lenders can also just be people the borrower knows who are willing to help out with funding and may not be as keen to make a profit.
Three main “circles” of individual private lenders:
- Primary circle: Family members, friends and colleagues – people who know you directly. You have the best chance of getting them to lend you money because they have a personal relationship with you and know your situation firsthand.
- Secondary circle: Minor acquaintances and friends of friends – people you have a connection to but don’t know as well. These people may be willing to hear your pitch for investing because you have some association with them.
- Third party circle: Accredited investors you don’t know. Getting money from them will usually take the most effort in terms of reaching out and convincing them that you are a worthwhile client. However, the process can be made easier through “peer to peer” lending sites that streamline connections online.
Are Private Lenders Legal?
It’s perfectly legal for organizations other than banks and credit unions to lend money. However, private lenders still have to comply with the usury laws and banking laws of the states in which they operate. In other words, the rates that they’re able to charge are regulated. Plus, depending on the state, a private lender might only be able to lend a certain amount without having a banking license.
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