Banks vs. Private Money Lending: What's the Difference?

[Laurence R. Smith]

When it comes to borrowing money, you have choices. Here's a quick breakdown of the differences between borrowing from traditional banks and private money lenders along with some perks of private lending.

1. Approval Process
Banks: Long and strict. Banks often have very rigid requirements, such as high credit scores and a detailed financial history as well as lots of paperwork.
Private Money Lenders: Faster and more flexible. These lenders care more about the value of the asset that is financed rather than your credit score or income documentation.

2. Speed
Banks: Can take weeks or even months to close a loan due to really extensive underwriting processes.
Private Money Lenders: Close loans usually in days to weeks, which will make it best for time-sensitive deals like purchasing a property or rehabs.

3. Loan Purpose
Banks: Often limited in traditional uses such as home purchases or business loans. They are not able to accommodate riskier or more out-of-the-box projects.
Private Money Lenders: Tailored for investment opportunities such as fix-and-flip projects, bridge loans, or rental properties.

4. Terms and Flexibility
Banks: Terms often inflexible. Loans are usually low interest, but repayment terms and due dates are strict.
Private Money Lenders: Flexible terms that can be structured according to your project's requirements. Although the rates are higher, for most borrowers, the convenience exceeds the additional cost.

5. Relationship-Based Lending
Banks: Normal transactions are always cold-blooded and policy-oriented.
Private Money Lenders: Most often work with borrowers to create solutions and value relationships over strict rules.

The Bottom Line
The power of private money lending, I think, is a pretty effective alternative for borrowers who need speed, flexibility, and customized solutions—especially in industries like real estate investing.