Private Loans – Common Mistakes That Novices Need to Avoid

Private Loans

Many people find it difficult to get a loan from banks or credit unions simply because they cannot fulfill the usually stringent eligibility conditions. Consequently, they seek out more informal sources of funds like private money lenderswho are willing to work with customers in a more flexible manner that can accommodate issues like poor credit history, discontinuous employment, risky collaterals, etc. However, many people are simply so relieved to find a willing lender that they rush ahead to conclude the deal and, in the process, make mistakes that can cost them dearly. Some top mistakes explained:

Not Having a Pre-Approved Loan

Many property buyers are so excited to find a property that they believe has great potential for making profits that they sign the contract with the seller even before lining up the funds to buy it. Since getting access to funds can take quite a bit of your time and effort, moving ahead prematurely can mean losing the deal to other buyers who are better prepared. The best thing to do is to get a pre-qualification from a lender or better still, a letter proving availability of funds. With a pre-qualification, your bid for the property is automatically more genuine and you could be able to seal the deal even if you are not the highest bidder as the seller can complete the sale process faster.

Not Knowing the Difference between a Bank Loan and Hard Money Loan

The main difference between a bank loan and a hard money loan from private lenders is in the repayment. If you take a bank loan, you have to pay back the loan and the interest in equated monthly installments over the tenor of the loan, however, if you take a hard money loan, you need to pay back only the accrued interest amount every month and the principal becomes repayable at the end of the loan period in a single shot. As evident, hard money loans are specially structured for real estate and property deals with the investor being able to pay off the loan with the sale proceeds of the property.

Not Knowing How Much Money You Need as a Loan

It is very important that you know how much to borrow as taking on a loan larger than warranted means that the money would be unutilized but you would still need to pay the interest. If the loan amount is too large, it can actually increase the risk of default. However, under-borrowing is also not an answer as you will not be able to buy the property and turn it around with limited resources. Make sure that you have a buffer that can take care of unexpected expenses. If you don’t have the experience to estimate how much money is required, working withsome of the more reputed private money lenders can be helpful.

Not Being Aware of the Loan Contract Clauses

Loan agreements that have to be signed before taking a private loan have a number of clauses that can contain nasty surprises if you are not aware of them beforehand. It is,therefore, extremely important that you carefully read everything in the contract, including the fine print, and take care to understand them and their implications. If you do not understand something, ask the loan company to give you a clarification or you could find yourself having to pay costs, fees or penalties that were completely unnecessary. Ask specifically about how frequently you need to make the interest payment as this varies from one company to another. Also, find out if there is a prepayment penalty and any other loan termination costs as that could take away a chunk of your profits. Reputed loan companies like do not charge any prepayment penalties.

Getting Turned Off by the Interest Rate

The rate of interest charged by private lenders will be significantly more than that charged by banks and credit unions and there are valid reasons for this. Firstly, private money lenders do not have access to cheap money from the public but rely on their own funds or that of their investors. Further, private money lenders tend to take on more risk as they typically lend to people with a higher credit risk and do not require the amount of documentation without which banks do not extend loans. Private money lenders are also prepared to fund real estate deals for a short duration with only the property as collateral. Even though typically, you can expect the interest rate to be in the range of 8%-12%, much higher than the bank rate, it is still worthwhile to consider these loans simply because with the quick disbursement, absence of bureaucratic procedures and complicated documentation, you can snap up properties, turn them around, and make your profit in double-quick time.

Not Engaging with a Lender of Repute

While it can be very tempting to deal with lenders who promise you a really low rate of interest and a no-questions-asked lending policy, you should generally steer clear of them in favor of lenders who have a more established reputation. This enables you to not only avoid falling prey to the numerous scams that will not only rob you of your precious money but also the valuable time in which you could have concluded the deal. Another big benefit of dealing with reputed lenders is that you can take advantage of their expertise in gauging the worth of the property and the mood of the market to help you make the most of the opportunity. Reputable lenders will also have clean and transparent policies that will not expose you to unnecessary charges and penalties.


When you take out a private money loan, the decision should not be whimsical but a result of a careful consideration of how much you want, the time required for the flip, the interest outflow, your capability to repay, the fine print in the contract, and ultimately, dealing with a lender who has your interest at heart. A reputed money lending firm can help significantly in advising you how to get the maximum profit out of a deal.

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About the Author: Son Sun

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