Nearly 20 million Americans have personal loans, while over 130 million have taken out a private loan at some point.

As banks tighten up lending, more consumers are turning to private lenders. It’s not uncommon to have bank loan applications declined, despite good credit scores. Thus, people are always on the lookout for hassle-free alternatives.

So, what is a private lender, and are they too good to be true?

Learn more in this beginner’s guide to private lending companies.

What Is a Private Lender Anyway?

A personal lender isn’t bank nor a credit union. It’s technically not a financial institution, but it is a financial service.

By definition, a private lender is simply someone (or something) who lends you money.

For example, if you ask your grandma for college textbook funds, she would be your private lender. If you take out a private student loan, the loan provider would be your lender.

Types of Private Loans

Here’s another example:

Let’s say you’re a house flipper and need a large loan right away. You don’t have enough funds to prove you can pay back the loan in time. However, you do own a home.

You can take out a private hard money loan that uses your house as collateral. Similarly, title loans hold your car as collateral. You can also refinance your property through hard money loans if you don’t qualify for bank refinancing.

Hard money real estate loans are popular with house flippers. Hard money loans are dispersed quickly, allowing investors to flip fast. High-risk flippers who don’t qualify for bank loans also enjoy lightning-fast funding.

You don’t have to wait for your home to sell to close the deal on a new property. Apply for a private bridge loan to buy a second home now as your previous home waits for a seller.

Unlike other private loans, borrowers with low credit ranges may have trouble qualifying for bridge loans, making hard money loans the best bet. Plus, many banks deem certain business ventures as too risky, while hard money lenders welcome the challenge.

Dig more into the advantages and disadvantages of private lender solutions to customize an ideal financing structure.

Instant Cash

You can also apply for small personal loans for as low as $500. If you’re in a jam, you can apply for a quick loan to cover rent or bills. There are also payday advances that loan you money before payday in exchange for a percentage.

The loan types above have high interest rates and only surge after missed payments. This payment structure is common with payday loans. Don’t take out a payday loan unless you’re sure you can pay it back completely.

Short-Term Goals

There’s another common thread among private lenders—short term loans.

Since many private loan borrowers are high risk, it’s not economical to take out a large long-term loan. The interest rates alone make paying back the loan virtually impossible.

Here are the best ways to spend a small short-term private loan:

Emergency Expenses

The average personal loan is nearly $7,000. Stop and think about how you would spend this money?

Many Americans are dealt with sudden hardship, like suddenly caring for a relative or getting laid off. $7,000 is enough to cover nearly 6 months worth of rent as you find a new job or move to a new city.

$7,000 can cover an emergency vet bill, roof leaks, termite infestation, or a new air conditioner.

What if you’re an independent consultant and your computer dies?

You don’t have an employer, so you’re responsible for your own equipment maintenance. However, you can apply for a fast private loan and have your new computer up and running within days. In fact, some private loans disperse within 24 hours.

Business Boost

Are you a few thousand dollars shy of starting your dream business?

Many entrepreneurs need just enough capital to build a website, product and ship products, and automate your marketing strategy. You get even more bang for your buck if you operate exclusively online.

$7,000 dollars more than enough for a professionally-made website. In fact, you can enjoy a pro site for under $1,000 or customize a WordPress template without any experience. You can even get an ecommerce hosting plan for as low as $300 per year.

LLCs are also inexpensive, with many states charging just $132 per year. Plus, you don’t have to pay to create and verify your Google business listing, a valuable SEO asset.

You also need automated business software, like social media management apps, accounting software, and SEO tools. Some of these programs can cost $99 or more. Thus, $7,000 is plenty of capital to enjoy the latest cloud tech. ​

These points underscore the importance of budgeting and planning before working with a private lender.

Learn a New Skill

Once you have the necessities squared away, think ahead. Where do you see your career in five years? What resources do you need to get there?

With the help of remote learning, $7,000 is enough to cover tuition, textbooks, and time investments. You could even apply for more money and cut your work hours down to part time.

If your program doesn’t qualify for a federal loan, there are plenty of private options. However, these loans come with higher interest rates.

Consider a hybrid strategy that leverages savings accounts and private loans. For example, you could set up automatic accounting, setting aside $50 from each paycheck.

Compare Notes

Don’t take the first loan offer that comes your way.

Consider these personal finance variables:

  • Your current credit score
  • Average cash on hand
  • House expenses (i.e., rent, bills, food, etc.)
  • All other debts (student loans, credit cards, etc.)
  • Vet bills, medical expenses, and childcare
  • Annual income and weekly paycheck

Once you have some data, work out a realistic payback timeline. Use this timeline as your repayment parameters. If the data says repayment within three months is impossible, look for 6-month or 12-month terms.

Lastly, draft a shortlist of private lenders with the lowest interest rates for high-risk applicants.

Enjoy Fast and Reliable Financing

What is a private lender?

It’s the lender of your choice! Your lender could be your sweet Grandma or a hard money lender, two sources willing to take a chance on your projects.

Find even more resources for success. The next post is just one click away!