Well, some people in this situation look to Private Lending. But what exactly is this, and would it be a viable option for you? Read on to find out.
Private Lending Summed Up
In essence, Private Lending is when you borrow money from a non- traditional lender. In many instances this non-traditional lender may come in the form of a private wealthy individual, a specialised Private Lending company, or from another firm or company that has excess cash that they would like to achieve a decent return on. In Australia Private Lending is predominantly used for business or commercial purposes rather than personal ones, such as a “mortgage” for home. This is partly due to the fact that these types of loans are classified as “unregulated loans” and therefore are not covered by the National Consumer Credit Protection Act.
This does mean that Private Lending is a riskier form of obtaining funds than traditional lending. This also makes it more expensive, as it comes with higher interest rates. So why do some consumers opt to obtain this form of funding?
Why Consider Private Lending?
Many consumers may choose to turn to Private Lending for a number of reasons. The two primary reasons one may opt to go with a Private Lending option rather than with a traditional loan are the quick turnaround for loan approval, and the less stringent loan application process
This means that not only can they obtain funding faster, they can also potentially acquire funding for endeavours that traditional banks would consider higher risk. Of course, this comes with a higher price tag to reflect this increased risk exposure. This price tag is reflected in the interest that the Private Lenders charge. Private Lenders can charge anywhere from 8-12% on loans, but sometimes they go as high as 20%.
This higher interest cost is worth it for some, especially if their objective is to cover a short-term cost. For example, when one commercial property has not yet been sold but the investor wishes to purchase another and requires the funds to complete the sale.
Who is Private Lending suitable for?
While there are many reasons one may opt to go for a Private Loan over a traditional loan most commonly those who acquire such loans are asset rich, and cash poor. Such as in the previous example, this can sometimes be used to bridge a temporary cash flow shortfall. Private loans are also taken out by new, niche companies who want to work on a new project but are so new they have no financials to back up their request for a loan from a traditional lender.
Generally Private Lenders require some sort of security for the loan. This means either an investment property, or some other equitable asset.
What are the Pros and Cons of Private Lending?
Private Lending is regulated by some Australian authorities, but it is not as highly regulated and scrutinised as the traditional lenders. This means there is greater risk with taking on a Private Loan.
Some of the benefits of taking on a Private Loan rather than a traditional loan are:
- Quick Turnarounds:
As there is less paperwork involved with Private Lending the turnaround time can be as quick as within the hour of application.
- No Background or Credit check:
Private Lenders care about two things: the security provided for the loan, and how you plan to pay it off. Therefore no credit or background checks are done.
- Term Flexibility:
Most Private Lenders are much more flexible about the terms of the loan, as well as what security you offer up to secure it. This works well for asset-rich, and cash poor individuals and entities.
However, Private Loans do come with their drawbacks:
- Establishment fees of 2-5%,
- Interest rates of up to 20%, and
- Short term loans, of up to 12 months.
In addition to the above, some Private Lenders insert a clause about an interest rate top up, which means after a certain period of time they can increase the interest rate. They can also add break fees if you pay off the loan quicker than agreed, similarly to traditional lenders.
Is Private Lending for Me?
If you’re a business owner, investor, or looking for a way to finance an investment property purchase then you could consider a Private Lender. However the higher interest rate should be carefully weighed up against how much profit you stand to make on your investment. Despite how quickly Private Loans can be taken out they are still a liability.
If you are curious about this type of lending and whether it might work for your unique circumstances, reach out to the Pursue Wealth team, and let us see if Private Lending is a viable option for your financial growth.
