Borrowers Don’t Grasp Relationship Between the Cost of Money and

[Corey Dutton]

Loan borrowers in need of fast loan fundings when purchasing investment real estate, often seek out private money lenders. This is because banks are simply unable to perform under the tight funding deadlines that are often required when purchasing investment real estate. Because the speed of funding can make or break a real estate deal in some cases, investors cannot afford to wait for slow lenders. Although the stakes may be high in real estate transactions, there are some borrowers who still fail to grasp the relationship between the cost of loans and the speed of funding.

A shorter timeline for funding a loan means less time to evaluate a loan, and therefore increases the overall risk of the loan. With increased risk also comes a higher return to the investor/lender and this equates to a higher interest rate. For example, if it takes a lender about 2 weeks to close a loan, and a borrower wants to close a loan in 4 days. In this case, the time to underwrite, or evaluate, a loan is less, which increases the risk and thus increases the cost of the loan.

Another reason that faster loan fundings equate to higher cost loans is because of opportunity cost. For example, let’s say a lender is preparing to close a loan in a given week. If another borrower comes along and needs to fund another loan that same week, the lender would have to put aside one of the loans to make room for the other. The opportunity cost of letting the other loan go to the wayside equates to a higher cost loan in some cases. For a lender to put aside other loans to fund one loan in such a short timeframe, this may increase the cost of the loan.

There are many circumstances where high stakes, or unique situations, create a need for fast funding loans. Loan borrowers must understand that a faster loan funding always comes with a higher cost.