When it comes to borrowing, most property owners think of getting a mortgage from the bank. However, the option of private lending can actually be more beneficial for borrowers depending on their situation. Every real estate investor should be able to distinguish the differences between private and bank lending. While traditional bank mortgages are less expensive, they may be harder to get approved. On the other hand, private lending is more flexible, however, it can be more expensive.
When people deposit money into their bank accounts, banks pay them a low interest rate (i.e. a savings account). The bank then takes those deposits to lend money out to borrowers as mortgages, auto loans, or lines of credit at a higher rate. This way, the bank makes a profit between the interest they are paying to depositors and the interest they collect from borrowers. Investors traditionally apply for loans from banks, and this is the most popular form of borrowing and lending. If you are in good financial standing and can be approved for low-interest mortgage rates, bank lending may be the option for you.
Investors often earn interest from the money they loan out. Private lenders receive funds from private investors, and invest their funds to borrowers as private business loans. As the private investors expect a large return on investment, interest rates for private loans are usually higher than those of traditional bank lending. The investors are loaning their money out to borrowers in a risky manner, so naturally, the interest rates charged will be higher. This will increase the borrower’s overall costs, however, it is easier to get a loan approved by private lenders. Those who have relatively lower credit scores may consider the option of private lending.
Bank Lending vs. Private Lending
What are the benefits and disadvantages of choosing either type of lending? The table below outlines some differences between Bank and Private lending.
|Bank Lending||Private Lending|
|Subject to detailed federal regulations||Not subject to as many regulations|
|Requires extensive background checks on borrower’s financial standing and history||May overlook flaws of the borrower in exchange for higher interest rates|
|Lower interest rates compared to private lending||Higher interest rates due to lender taking on more risk|
|The mortgage-approval process is largely automated and has little room for flexibility||Can customize each loan based on the borrower’s financial situation and needs|
At Integrum Mortgage, we are well-prepared to discuss the form of lending that best suits your needs. A well-respected firm in the lending industry, we have insight into a variety of banks which offer a wide array of services for you to choose from. We are also connected to a network of private investors who are willing to lend their abundant resources at the best interest rates. Book an appointment with us today, and depending on your needs and preferences, we are ready to serve you with the best mortgage option.