26:["$","$L27",null,{"category":"$28","relatedArticles":[{"id":"cG9zdDoxNjU2NzY=","databaseId":165676,"postId":165676,"author":{"node":{"id":"dXNlcjo5Mw==","databaseId":93,"userId":93,"avatar":{"url":"https://secure.gravatar.com/avatar/04483497dbd73f712b504e401c9c7d22?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Mark Henricks has reported on personal finance, investing, retirement, \r\nentrepreneurship and other topics for more than 30 years. His freelance \r\nbyline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"William","fullName":"Mark Henricks","lastName":"Henricks","name":"Mark Henricks","postCount":{"pageInfo":{"offsetPagination":{"total":767,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mhenricks","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybTo1NDM3","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":5437,"categoryId":5437,"link":"https://smartasset.com/personal-loans/articles","name":"Personal Loans","postCount":{"pageInfo":{"offsetPagination":{"total":25,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"personal-loans","ancestors":null,"parent":null,"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$29","date":"2022-07-13T14:34:55","excerpt":"

\n","featuredImage":{"id":"cG9zdDoxOTEyNTY=","databaseId":191256,"altText":"private money lending","date":"2023-03-19T02:01:01","fileSize":29579,"mimeType":"image/jpeg","modified":"2023-03-19T02:01:01","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2022/07/partner-has-made-a-fraud-in-the-contract-of-sale-and-being-handed-a-picture-id1306239075-1.jpg","__typename":"MediaItem"},"modified":{"datetime":"2023-3-19","readable":"March 19, 2023"},"multipleBylinesByRole":{"editedBy":null,"reviewedBy":null,"writtenBy":null,"factCheckedBy":null,"secondEditor":null,"hideAuthor":null,"__typename":"Post_Multiplebylinesbyrole"},"adTargetingOverrides":{"fieldGroupName":"adTargetingOverrides","pageGroupNewKey":null,"__typename":"Post_Adtargetingoverrides"},"seo":{"canonical":"https://smartasset.com/personal-loans/how-private-money-lending-works","metaDesc":"Private money lending involves taking out a loan from private investors or a fund of investors. Here's how to get it, and the pros and cons to consider.","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":4,"title":"How Private Money Lending Works - SmartAsset","__typename":"PostTypeSEO"},"slug":"how-private-money-lending-works","status":"publish","title":"How Private Money Lending Works","uri":"/personal-loans/how-private-money-lending-works","tags":{"nodes":[],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":{"id":"dXNlcjo5Mw==","databaseId":93,"userId":93,"avatar":"$2a","description":"Mark Henricks has reported on personal finance, investing, retirement, \r\nentrepreneurship and other topics for more than 30 years. His freelance \r\nbyline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.","additionalMeta":"$2b","email":null,"firstName":"William","fullName":"Mark Henricks","lastName":"Henricks","name":"Mark Henricks","postCount":"$2c","slug":"mark-henricks","__typename":"User"},"editedBy":null,"reviewedBy":null,"factCheckedBy":null,"secondEditor":null},"category":{"id":"dGVybTo1NDM3","children":"$2f","databaseId":5437,"categoryId":5437,"link":"https://smartasset.com/personal-loans/articles","name":"Personal Loans","postCount":25,"slug":"personal-loans","ancestors":null,"parent":null,"__typename":"Category"},"isModifiedBeforePublished":false,"contentBlocks":["

Private money lending occurs when a wealthy individual or private organization loans money to a person or company. Private money lending is common in real estate investment. Private money lenders loan money to investors who purchase and, often, renovate properties for resale or rental. Private money lending is less regulated and more flexible than lending by licensed lenders such as banks. A financial advisor can help you decide whether a private money loan makes sense for you.

","

Private Money Lending Basics

","

The defining characteristic of private money lending is that the money for the loan is provided by an individual or a private organization. Often, the lender is a family member or friend of the borrower. When the private money lender is an organization, it is not a bank or other licensed lending organization.

","

Private money lending is not subject to the same regulations that govern other lenders, but the business is not completely unregulated. Private money lenders do have to follow state usury laws that limit the amount of interest that can be charged. They may also be limited in the number of loans they can make.

","

Interest rates on private money loans tend to be higher than loans from licensed lenders. From 15% to 20% is typical. However, in the case of a loan from a friend or relative, they may also be lower than market rates. Private money loan payments may be interest-only for the term of the loan, with a single large balloon payment at the end.

","

Qualifying for a private money loan is different from qualifying for a regular loan. The lender is likely to focus as much on whether a specific deal makes financial sense as on the credit history or score of the borrower.

","

Terms on private money loans are often short, just six to 12 months, but may also be payable over up to five years. They generally require a down payment and often are secured by the property. The lender will typically require a written plan describing how the money will be spent.

","

Private money lending is similar to hard money lending. They are both often used in real estate investing and involve getting financing from somewhere other than a bank. Hard money lending, however, is more similar to mainstream lending, such as from a bank and less like friends-and-family financing via private money loan. It may be harder to qualify for a hard money loan.

","

Pros of Private Money Lending

","

Private money loans are more flexible than traditional financing. Borrower qualification guidelines are fewer and less strict, especially when the lenders are friends or family members. One key difference is that private money lenders are more likely than others to be willing to finance the acquisition of distressed property in need of significant repair. This allows investors who are short of cash to purchase low-priced properties and pay for renovations that increase the value of the properties.

","

The flexibility of private money lending also makes it faster. A borrower can get the money to do a deal in days, rather than waiting several weeks to get funded by a conventional mortgage.

","

Cons of Private Money Lending

","

Private money lending also carries added risk for both borrower and lender. Private money lenders are taking more risk due to their less strict qualification guidelines. To compensate for the added risk, private money lenders charge higher interest rates than other lenders. This can make it harder for borrowers to turn a profit on deals. Also, because loans are typically short-term, a borrower has to be able to sell or refinance the property relatively quickly, before the loan comes due.

","

It can be more difficult for borrowers to find private money lenders, since they may not advertise like banks and more established lenders. Talking with friends and family is one way to find sources for loans. Borrowers may be able to identify other potential private money lenders through professional networking, social media such as LinkedIn, internet searches and real estate investment events.

","

Bottom Line

","

Private money lenders are individuals and organizations that provide money to investors, usually for real estate loans. Private money lending is less regulated but more costly than other sources for loans, such as banks. Many private money loans come from friends and family, but organizations may also be private money lenders.

","

Tips for Borrowing Money

","$31","

©iStock.com/wutwhanfoto, ©iStock.com/jat306, ©iStock.com/inewsistock

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Building wealth starts with making solid investments, but how do you do that when you don’t have a lot of cash? You could break into your piggy bank but another option is to take out a personal loan. Borrowing money to invest can pay off if you know what you’re doing, but it’s not risk-free. If you’re thinking of getting a personal loan to play the market, here’s what you need to consider.

","

A financial advisor can help you create a financial plan for your investment goals and needs.

","

5 Things to Consider Before Getting a Personal Loan

","

A personal loan can both make or break your investments. Here are five things you should consider as an investor before taking out a personal loan to finance your investments:

","

1. Check the loan rates. Before you start snapping up stocks, you’ll need to find out what kind of interest rate your lender is offering. Earning high returns on your investments won’t do any good if you have to hand a big chunk of it back to the bank. If the loan’s APR is more than half of the investment’s average return rate, you won’t be earning much money.

","

2. Weigh the payments. Ideally, if you’re taking out a loan to invest the goal is to have returns rolling in on a regular basis that you can use to repay what you borrowed. If you’re taking a long-term buy-and-hold approach to investing, you might be waiting a bit longer to realize any gains. If that’s the case, it’s important to make sure you can afford the loan payments in the meantime.

","

That’s particularly important if you have other debts you’re paying down, such as student loans or a mortgage. If you fall behind on your personal loan payments, you can open yourself up to a world of financial trouble. The lender could seize your collateral or sue you and if they win, your wages could be garnished.

","

In the worst-case scenario, you might have to file bankruptcy to get out of the mess. So you’ll need to be sure your loan payments aren’t going to put you in a financial bind.

","

Check out our student loan calculator.

","

3. Study investment performance. Jumping into the stock market without doing your research isn’t a good idea, especially when you’re doing it with borrowed money. If you’ve got your eye on a particular stock or mutual fund, you’ll need to look at how it has performed since its inception date, not just over the last few months.

","

Just because a stock is doing well right now doesn’t mean it’ll perform well in six months. If you’re not careful, you could end up losing money. And even an investment with solid past performance isn’t guaranteed to perform in the future.

","

4. Assess your comfort with risk. If you pay any attention to the news at all, then you probably know that the market can change in the blink of an eye. If you’re thinking of using a loan to invest, how well will you stomach the market’s ups and downs? Some people can take on more risk to have the possibility of bigger rewards but if you’re not one of them, borrowing to invest might be outside of your comfort zone.

","

Try out our asset allocation calculator.

","

5. Review the fees. Along with charging interest, lenders might impose certain fees when you get a personal loan. Even if it’s just a few dollars a month, every nickel and dime counts in terms of eating into your investment returns.

","

Aside from the lender’s fees, you’ll also have to think about what the investment itself is going to cost. If you’re buying stocks through an online broker, for instance, you might have to pay a trade commission every time you complete a transaction. Mutual funds carry their own management fees that you’ll need to watch out for as well.

","

Bottom Line

","

","

Using a personal loan to invest can be a big gamble and it’s definitely not for the faint of heart. Before you pull the trigger, it’s best to analyze the pros and cons from every angle to make sure you know what you stand to gain and potentially lose.

","

Personal Loan Tips

","$3a","

Photo credit: ©iStock.com/Lorraine Boogich, ©iStock.com/SolStock

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If you default on a mortgage, the bank could repossess your home to recover part of their money. When it comes to personal loans, however, the only thing securing it in many cases is your own reputation (unless you plan to get a secured loan). Before you go out and apply for one, you might want to look at the pros and the cons of getting an unsecured personal loan.

","

Do you have questions about managing your money according to a financial plan? Speak with a financial advisor today.

","

What Is an Unsecured Personal Loan?

","

A personal loan is a way for you to get money for things you might need, such as to pay off medical debt, make improvements to your home or any other number of things. the unsecured part of an unsecured personal loan means that to get the loan, you don’t need to put down any sort of collateral. On the other hand, something like a mortgage has the home you’re purchasing as collateral.

","

Because an unsecured personal loan has no collateral backing it, you may encounter higher interest rates, fees and other things they could limit how far is the loan could go. In addition, the lack of collateral could make it hard for those with lower credit scores to get approval.

","

The Pros of Unsecured Personal Loans

","

No Risk to Personal Property

","

There are personal loans that are secured and there are those that aren’t. When a personal loan is secured, it’s backed by collateral that your lender can take if you can’t pay off your loan.

","

The good thing about having an unsecured personal loan is that your personal property usually isn’t at risk in the event of a default. So you won’t have to worry about losing your home or any of your other assets if you get laid off and making on-time payments becomes difficult or impossible.

","

The Application Process Is Simpler

","

","

Because there are other lenders besides banks and credit unions that offer personal loans, the process of getting one isn’t as complicated as it once was. You can apply for a loan from a peer-to-peer lending site from the comfort of your own home. And it’s possible to get approved for one in less than 24 hours.

","

Whether you qualify for a loan depends on your credit history and credit score. Besides that, you’ll need to be able to provide proof that you have a stable and secure source of income.

","

The Cons of Unsecured Personal Loans

","

If You Default, Your Lender Could Come After You

","

Even if a personal loan isn’t backed by a particular piece of personal property, a lender may still be able to place a lien on your assets in order to secure repayment. In order for a lender to obtain a lien, he must sue you in court. In addition to paying for the original loan amount you borrowed and late fees, you could be forced to pay for attorney fees and court costs.

","

After it’s all said and done, you could end up with a stain on your credit report and your wages could be garnished in the event of a successful lawsuit.

","

Loan Amounts May Be Smaller

","

","

It’s no secret that lenders make money by charging interest on loans, but there’s no profit if the loan is not repaid. That’s why lenders go to great lengths to limit the risk of borrower default. They check credit reports, verify employment and in the case of unsecured personal loans, they might limit the amount of money they lend you (especially if your credit score is low).

","

Rates and Payments Are Higher

","

Since unsecured personal loans are riskier than loans secured by property, lenders tend to charge higher interest rates. How much higher the rates are depends on your credit score and the amount of money you’re borrowing. As of May 2021 interest rates on unsecured personal loans ranged from 3% to 36%. It’s important to note that lenders may hide a portion of the higher interest rates in upfront fees such as loan origination and application fees.

","

With a higher interest rate, your monthly payments could be higher than they would be for a secured loan. And the longer your repayment period, the more you’ll pay in interest.

","

Before you sign off on a loan, make sure the monthly payment is within your budget. Personal loan agreements sometimes include substantial late payment penalties that can further upset your ability to make regular payments.

","

Finally, consider using SmartAsset’s personal loan calculator to find out what the total cost of borrowing really is. You may be unpleasantly surprised at how much you’re actually on the hook for. It could be that you’re simply exchanging a current problem for a future one that will be much more onerous.

","

Bottom Line

","

Of course, unsecured personal loans have their advantages. You can obtain a loan online without going through a strict underwriting process. You can then use the loan to cover a variety of expenses like unpaid medical debt or home improvement. But unsecured personal loans can be risky as well and you might have to settle for a higher interest rate. Avoid only thinking about what you can gain from getting a personal loan. Instead, consider what you might stand to lose.

","

Financial Planning Tips

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Mixing money and family can quickly become very tricky. The reality, though, is that many of us will go through tough financial times—whether we’re just starting out on our own, we recently lost a job or we had some other major expense come up that we weren’t prepared for–and family members are often the first ones we ask for a little financial assistance. There are some pros and cons to allowing family members to borrow money, however. Here are some you should consider:

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Pro #1: Teach Fiscal Responsibility

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If your family member finds themselves in need of extra money due to poor spending habits or lack of savings, this can be an opportunity to teach them about being more responsible with money. You can set boundaries around the money you lend, such as when it needs to be paid back by, and even charge interest. This is especially effective when lending to teens or young adults to teach them how to better manage their money, without harming their actual credit rating.

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Pro #2: You May Need Help in the Future

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Now, of course, you should not lend money to family with the stated intention of being able to borrow in the future. That said, there may come a time when you need a little help of your own. Naturally, it will be up to you and your family member to discuss future methods of payback or favors.

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Pro #3: Helping Someone You Love

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Sometimes family members just need help. They may need to borrow money through no fault of their own, and helping them out can just feel good. No one wants to see their loved ones suffer, and if you are financially capable of helping them out, it can be empowering to give the assistance they need. Of course, you should not let yourself be taken advantage of, but if you are able and willing to help, it can be a great feeling.

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Con #1: Becoming Known as the Family Bank

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If you are known as the person everyone can rely on to borrow money from, it can lead to family members taking advantage of your generosity. This could then lead to constantly being asked to lend money to more than one family member. For this reason, it’s important to take into consideration whether or not you will begin to be looked at as the family bank.

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Con #2: Resentment

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If you lend a family member money and they do not pay you back or adhere to some other terms that were agreed to, tension and resentment can easily arise, which can make for some uncomfortable family get-togethers and holidays.

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There’s also the possibility that if you lend to one family member, and not another, resentment can stem from that, as well. It’s necessary to look at whether your family member is mature and responsible enough to not gloat the fact you let them borrow money and will actually pay you back, if requested.

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Con #3: Overextending Your Own Finances

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We all want to help those we love. Yet while you don’t want to see a family member down on their luck, sometimes you are not in the financial position to help them out. If you have to overextend your credit or risk not paying your own bills to provide a family member money, it’s probably not the right decision to lend it. You don’t want to put yourself in the position to have to be the next family member asking to borrow money because you were too generous.

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When it comes to allowing a family member to borrow money, there’s a number of important considerations to be made. While you may have the best intentions, things may not turn out as well as you hope, and you could find yourself overextended, constantly being asked to borrow money, and resenting family members.

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On the other hand, there are benefits to helping those you love, as well as the possibility that you may need help one day. No matter what decision you make, make it with a clear mind and stick to it.

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Update: Have more financial questions? SmartAsset can help. So many people reached out to us looking for tax and long-term financial planning help, we started our own matching service to help you find a financial advisor. The SmartAdvisor matching tool can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to up to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.

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