As Benjamin Franklin says “An investment in knowledge pays the best interest” a vast number of people are turning to private lending as a beneficial investment option. Banks and financial units are under strict regulations that are designed and implemented to mitigate risks. In the wake of Global Financial crisis, banks and financial units are facing heavy expenses. It was never difficult for banks and financial units to lend loans as it is now.
There is a financial gap caused by banks’ control on quick lending schemes and the financial needs of emerging businesses. Private loan originators are seizing this opportunity to fill the gap as private lending has captured the fancy of investors.
Private loan originators are not only using the financial gap, but they are also opening up various avenues to customers as these opportunities were limited to big organisations in the past. Aside from the financial gap, the customers and businesses that don’t have adequate credit to loan money from banks are choosing private lending.
Private loan originators are all around us. A private lender is an individual that offers a loan without any security and collateral. He or she can also take responsibility for your financial affairs & real estate agencies can help without any hassle. Based on various industries private loan originators provide loans such as corporate credit, leasing equipment, loans for real estate deals and general financing for consumers.
Private lenders ask collateral or security from corporate houses. They also ask the borrowers to pay the liability expenses in equipment leasing. Private loan originators can give mortgages or building construction support to real estate deals. General consumers are those people with credit cards, financial assistance or a student loan.
Private lending as a way to fill the financial gap
Private lenders are regarded as one of the most trusted and loyal lenders that have opened up so many ways to borrowers for them to access private lending amounts that were limited in the past. An investor who wants to diversify his portfolio can look at private lending as an effective investment in comparison to the regular investments.
Private lenders and challenges
Private lending deals with loans given without securities or collaterals. A private loan originator is always at risk with an unknown borrower. In spite of borrower’s background checks and reports private lenders are at risk of losing their money.
The only solution to this problem is to have access to a wide network of private lenders and to transact with a known or a trustworthy borrower.
Some of the risks faced by private lenders:
- Private loan originators should have an impeccable ability to distinguish between potential business and deceitful debtors.
- Private loan originators are under pressure to maintain a fine balance between high-profit margin and safeguarding the loan amount.
- Private lenders can run into troubles if they fail to draft and design foolproof loan documents. They should underwrite such documents with great care.
- Private loan originators struggle to recover their investment amount even when they come out of a bad situation with the borrower.
- The debtor may mislead the private lender about the insurance cover, or he may have a different insurance cover. In such situations, private loan originators cannot recover losses should such situation arises.
- There are fraudulent borrowers whose sole intention is to cheat the private lender financially.
- Any misinterpretation by the debtor can land the private lender in uncertain situations and finally he or she may lose the money.
- The collateral property may lose its value should the debtor break any zoning law or building codes
Does private lending sound too dangerous to invest? Well, with expertise and knowledge about borrowers and the private market lenders can certainly reap high profits from private lending. It is not all bad as it sounds.
Perks of being a private lender
- One of the most rewarding benefits of being a private lender is the high returns. Experts feel that with a proper underwriting and a long standing relationship with trustworthy borrower private lenders can reap maximum benefits.
- Another advantage of being a private lender is the high rate of returns. Private lending allows rates that are somewhat stable compared to other investments.
- If a private lender is business savvy, he can avail tax-free returns.
- In case of loan repayment failure, especially in mortgages private lenders can proceed with foreclosures. And in such instances private lenders may benefit from high property value and low loan amount.
- The trick behind being an efficient private lender who can reap maximum returns, one need to comprehend the private lending industry and risks associated with it. In-depth understanding of private lending can help private lenders to create a safety net.
When a person is interested in becoming an originator of a private loan and one who is already a private lender can build their network with other private lenders to gain knowledge. Any form of risk can be minimised when a person has knowledge about what he or she is dealing with. One of the main concerns of a private lender should be to minimise risks and maximise the returns.
Why is a borrower interested in private lenders?
- Borrowers who get rejected for their loan applications from banks would be interested in getting assistance from private lenders. The borrower could be rejected for a consumer loan, mortgages, student loans, etc.
- If a borrower is in need of urgent financial support, he or she cannot depend on banks because the loan sanction procedures and processes consume a lot of time. In such situations, the borrower can certainly contact a private lender.
- There are certain situations when a bank rejects a borrower’s loan application in spite of the good credits and collateral. The property of the borrower may not be considered good by the banks (Eg: property in a rural area/the property may need renovation). Banks have strict guidelines to accept collateral or securities. In such cases, the borrower can approach private lenders.
- Some borrowers due to a good relationship and understanding with the lenders may not be checked for credit scores or credit reports.
- Another beneficial aspect for a borrower to consider a private lender is that he or she can expect flexible debt amount payment terms. A good working relationship with lenders can help the borrowers to try for a negotiable deal. Such negotiations may not be possible with banks.
- The borrower will be in touch with his lender who has given him the loan. There are no middlemen or procedures between them. Such proximity facilitates a good communication. When there is a good communication between the lender and the borrower problems can be sorted out easily, especially when the borrower cannot make payments on time etc.
- If a debtor has lent financial assistance from private lenders his or her business, the borrower will be greatly benefitted from the flexibility of the loan payments. He or she can negotiate a term with their lender wherein monthly payments may not be necessary.
- For entrepreneurs, private lenders come cheaper than business partners! Yes, having a partner in your business can cost a lot of money and time.
- The exit procedures with private lenders are more flexible and easier.
- Depending on the relationship between a borrower and a lender, borrowers can expect higher amounts of loan that they may not get from banks.
Private loan originators: The not so good side
Trust can be broken between two parties at any point of time due to various reasons. The borrower may resent the lack of structure, or the lender may suspect borrower’s trustworthiness. Such unrest can cause a difference of opinion, and the loan term may suffer.
There are companies that scam borrowers to rip them off financially. The borrowers must exercise caution against deals that sound too good to be true.
After the big financial showdown, banks have restricted activity in loan sanctions and approvals. Banks also incur heavy expenditure as a result of such regulations. The banks have raised their bars higher to assist borrowers by lending money. Private lending has used this financial gap to its benefit. Many borrowers who need financial assistance are opting for private loan originators.
Private loan originators offer flexible terms, higher loan amount and quick cash for those in need. Such factors influence borrowers to transact with private lenders. On the other hand, private lenders are rewarded with premium returns. However, private lenders still risk their money in the market. They can get cheated with their money by bogus borrowers.
If a borrower has intentions of deceiving a private lender, the private lender may experience difficulty in safeguarding their money. For private loan originators, private loaning is a constant struggle to balance between minimising risks and maximising benefits. The market for private lending looks promising. People are willing to invest in private lending.
Private loan originators are gaining a foothold against traditional lending agencies and units. Experts predict that private lending has a huge potential in coming days. People who are business savvy and those who are looking for an orthodox investment options private lending may look like a fresh lease of life.