When an investor has money to invest and is willing to take the risk of giving it out to borrowers and other parties who are in urgent need of money, this can constitute private money lending. In such deals, there is no interference or the rules and red tape that is often involved in obtaining funds from banks or other institutional lenders. This benefits both the borrower and the lender, as the borrower is assured of quick access to funds and the lender a higher rate of interest.
Many real estate deals take this route, especially where time is of an essence and is often greatly advantageous to the seller of the property as well. Finance through private money lending requires a higher interest than normal, but the advantages are immediate disbursal after terms are agreed to in negotiations. It is a contract made between two parties and is always flexible, depending on the risk that the lender perceives, the confidence that the borrower instills in the lender and the amounts involved. We must stress that private money lending will insist on some form of security mainly as a lien on the property for which the finance is being arranged. Lenders will expect to be assured of the genuineness of the property and its viability for resale or leasing. They may also insist on the property being insured in their name that helps them to cover all the risks of any disaster. Amounts offered by private party lenders will rarely cover the full value of the property, even though they will insist on a deed of trust that enables them to take over the property in case the borrower defaults on repayment. This enables them to be sure of some profit, even when a loan turns bad.
The advantage to borrowers from private money lending is that they often have an advantage when buying a property from sellers when they can assure them of immediate cash, without any need for financing. As the borrower completes the repayment of previous loans, he is able to get access to larger funds for future deals. Cash is then always available at any time and this negates any high interest that such lending requires, as long as these costs are covered in whatever future transactions the borrower intends to make. This then gives this person the ability to have continued access to money that enables taking up more projects. Private money lenders also do not insist on any credit ratings, as their investment is covered by properties.
Loans through private money lenders are easier to get as there are few formalities other than the agreed trust deed, with the money being made available in a few days. The private money lender has only to be convinced of the viability of the property that is being purchased by the borrower. It can often make more sense to go in for private money than to take in partners with whom profits would have to be ultimately shared.