The Concept of Money Lending and What Borrowers Need to Consider

Concept of Money Lending | Money lenders are those who are primarily into the money lending business. They are mainly categorized into two as professional money lenders and private, non-professional money lenders. Professional lenders are those who run money lending as their primary business. The non-professional lenders are the ones who are primarily into some other career but run money lending as a side business.

Many are doing private money lending side-by-side to their primary career as landlords, merchants, agriculturists, rich widows, traders, advocates, teachers, pensioners, other people in business and many who have surplus funds in hand. You can find many professional lenders at the urban areas, but there are private lenders at both urban and rural areas. In fact, when we consider the process of money lending, the segregation between professional and non-professional lending is not so water-tight.

The activities of moneylenders are:

  1. The primary function of a moneylender is to offer short-term loans to individuals and businesses. These loans are offered for people to meet their social needs, small businesses to find working capital or similar purposes.
  2. Small cash lending as a part of private money lending is offered in the personal security of the borrowers. However, loans are also offered against the security of some costly at urban areas and against land or crop at the rural areas, etc.
  3. The lenders mostly have some personal contacts with the borrowers in case of informal private lending.
  4. In private lending, the lenders usually offer their surplus fund in hand as loans to the needy.
  5. As the moneylenders may have a basic understanding of the creditworthiness of the borrowers, they adopt some intuitive approach as a rigid or flexible approach while deciding the interest rate or the recovery of the loans.
  6. Many of the non-professional lenders to charge higher rates of interest on the lending.
  7. You can find the moneylenders at the rural areas as more influential who try many pressure tactics while trying to recover loans like forcible seizing of the borrowers property etc.
  8. Even though there are strict regulations to monitor the financial activities related to lending, sometimes there could be some malpractices too happening in money lending. There are chances that the lenders manipulate accounts, deduct interests in advance, demand some donations, etc.

The role of a money lender is very important as the role of financial agencies and banks is inadequate in meeting the financial needs of a wide range of individuals across the spectrum. The procedures of private money lenders are also much simpler compared to that of the banks and financial institutions in terms of approving fund advance and releasing it.

Professional money lenders like are important in any society as they provide the most necessary article to meet the daily life requirements of individuals. Being in personal contact with lenders, the borrowers can approach them informally. Even when they get loans against personal security, as there is a bond between the borrower and lender, the process is much smoother. In such a community, a non-professional lender too is considered as a friend in need.

Things to consider while trying private money lending options

As we saw above, private lenders are non-institutional lenders who offer short-term loans. They are generally called as “hard money lenders.” Consider a private money lender in order finance for your needs; you may take care of a few things as we discuss here.

Considering hard money lending is an idea for both the short-term fund advance needs and also the long-term investments to be made. There are three degrees of private lenders available. Each of these roles is considered base on the relationship between the lender and borrower.

  • Primary circle – borrowing from family and immediate friends.
  • Secondary circle – Colleagues and relations from second-degree personal and professional acquaintances
  • Third-party – Some established hard money lenders or accredited investors. 

The hard money lenders are usually counted as the “third-party” lenders, which are third-degree relation to the borrowers. However, these lenders are considered to be the best among private lending as they are more reliable and also functions with a standardized interest rate and more structure loan terms out of their experience.

You may check the directory of private lenders if you are looking for a private lender to approach. Private lenders are apt for the below category of people:

  • Those who are planning to purchase, renovate, and sell properties in a year.
  • Investors with short-term and long-term investment goals and expecting a better return.
  • The buy-and-hold type investors who are aiming at renovating your property to refinance it with a mortgage.

Interest rates of private money lenders

The interest rates of private money lenders may vary. These are primarily considered as interest-only payments. The borrowers typically pay monthly interest through the loan term and then ultimately make the payment of the capital loan amount at the end of the term. Some of the lenders tend to charge prepayment penalties also if a loan is paid before the set due date.

The interest rate of private lenders may vary from 7% to 13%. The lender fee may typically be 1.5% to 10%. The closing cost may be about 2% – 5%. The monthly payments of hard money loans are not amortized as in case of a conventional mortgage. But, even when the interest of a private money loan may remain higher than a conventional mortgage, the monthly payments may be less until the end of term where the full amount is paid back. This is the reason why private loans are ideal for the fix-and-flipper type of borrowers who reduce the holding costs. The private loans are also ideal for the buy-and-hold type of investors as the monthly repayment is not huge as compared to another conventional mortgage they can avail.

Most importantly, the approval period for private money loans could be much smaller than conventional loans. You may get such a loan approved in to say less than 15 minutes or so if you are found eligible. Loan term for hard money lending could be about one to three years, whereas, for conventional mortgages or bank loans, the term may be higher.