Let’s be upfront here; private lenders are not banks!
Private lenders differ from traditional lenders such as banks, as they have a private pool of their funds and will assess borrowers on an entirely different set of criteria.
Nearly all private lenders are there to offer borrowers short-term funding solutions, especially when they are looking to buy a property. These loans are commonly known as bridging loans and are an excellent solution for investors for property buyers who need to fill the gap with immediate funding until they can get access to cash from more traditional lenders such as banks.
What types of financing options do private lenders offer?
Private lenders offer financing solutions and lending options to borrowers that traditional lenders cannot provide. Following are typical financing options from private lenders.
A caveat loan or mortgage is a type of finance arrangement whereby money is lent from a private lender to a property borrower on the basis that the lender is entitled to lodge a caveat against the title of the property as security for the loan. These caveat loans are usually offered between 60 to 90 days and settle very quickly. In addition, interest is generally prepaid and capitalised onto the loan. If you want to settle on a property quickly, then a caveat loan is an excellent option for business owners to purchase a commercial property. Because these loans settle fast, you can generally have your loan approved within 48 hours and the money in the bank within a couple of weeks.
Bad credit loans
Bad credit loans are available to borrowers with defaults or judgements listed on their credit files. If they have a bad credit rating or poor credit history, banks or traditional lenders won’t loan them money until they clean up their credit history and show a lesser risk level. These loans are perfect for people who may have defaulted a loan repayment in the past and want to buy a property and need a little more time to renegotiate with their bank. The only downside of bad credit loans is that they generally come with higher interest repayments due to increased risk. Also, they are for shorter periods.
Investopedia defines a second mortgage as a type of subordinated mortgage made while an original mortgage, or first mortgage, is still in effect. In the event of default where the borrower is unable to repay the loan capital, the original mortgagee (the lender) would receive all proceeds from the property’s liquidation until it is all paid off, and then the second mortgagee would receive a portion or all of what is remaining to cover their debt portion, fees and interest too. Because of this first and second-ranking structure, a loan secured by a second mortgage comes with higher risk profiles for the lender and is subject to higher interest rates.
What are the advantages of using a private lender?
Fast approval process
Private lenders specialise in lending money to borrowers that find themselves in unique circumstances. For example, suppose you have bad credit or cannot meet the strict documentation requirements from the banks. In that case, most private lenders ( like Sparrow Loans ) will be able to wield their magic and work out a solution for you so that you can buy the property. We all know that dealing with banks can be complicated, especially when the timing is critical; private lenders help fill the gap nicely. So if you are a borrower that has spotted a golden opportunity in the property market and wants to jump on it, a private lender may be your best option. Just imagine being able to have funds in your account in a couple of weeks instead of months! Chris Curtis from Sydney’s premier buyer’s agents who specialises in helping clients find off-market properties in Sydney explains that many of his newer clients are opting for private lending solutions for properties that want to snap up quickly rather than waiting for a bank’s approval.
Private lenders can come up with specialised lending products that banks cannot offer in the short or medium term. For borrowers that need a construction loan, commercial property loan, or need to settle on a property quickly, a decent private lender will be able to structure creative financing options that most non-private lenders such as banks simply cannot.
What are the disadvantages of using a private lender?
Higher interest rates
Because you might have a higher risk profile, private lenders will often charge you higher interest rates for the loan. In addition, some private lenders might also charge higher monthly fees because of your risk profile.
Shorter loan terms
While traditional business property loans are generally on 25- to 30-year terms, private lender mortgages fill in the gap. The loans are, therefore, for shorter periods while the lender can arrange finance from the banks. Say, for example, you want a construction loan or a bridging loan; a private lender will be able to get you money to cover initial immediate cost commitments. So, this loan period is usually up to 12 months.
Private lender property loans will not have the same features as traditional bank loans as they are usually a stop-gap measure and a short-term lending solution. Most private lenders are also much smaller than traditional banks and therefore cannot provide the level of complexity and loan product range needed for some businesses. You also usually cannot use private funds as a redraw facility or part of your offset account. These funds are for a specific purpose only and must have a clear exit strategy.
Get in touch with a private lender for specialised help with business property loans.
If you can’t seem to get funds or financing from the banks in the short term and are looking to settle on a property urgently, get in touch with the team at Sparrow Loans today. Our private lenders are experts at finding ways to get you the funds needed to grow your business and property portfolio.