How Much Do Private Money Loans Cost

Posted on: October 5, 2011

Categories: Buy, Other Articles

Author: lbuen

Private Money Loans Up for Grabs With a Hefty Price

Private money loans may be more readily available as compared to traditional loans, but this accessibility comes with a price tag. True, you can do away with the piles of paperwork, credit check and other prerequisites required by banks and conventional lenders, saving you time and effort. In lieu of these is are steeper rates and points that you do not usually encounter when transacting with banks, making private money more expensive. Another reason why private money is dearer (and riskier) is because the loan is not insured by a bank or government entity. Let us get to know what these costs are.

Breaking Down the Cost of Private Money Loans

The price tag of private money loans can be broken down into two parts: interest rate and up front points, where 1 point is equivalent to 1 percent of the loan amount.

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Private Money Loans Image by Images_of_Money via Flickr

Interest Rate

Remember the investing maxim: the higher the risk, the higher the rate. Because private money loans involve a higher risk for private lenders than traditional loans, they also charge higher interest rates. Risky loans are typically rejected by banks but private lenders entertain them, albeit for a price – higher interest rates to allow them to earn a higher rate of return. The average going rate is at 10 percent, but this will shoot up for offbeat and riskier deals. The cheapest rate you may get is at 7 percent.

Upfront Points

As compared to a bank loan, a private money loan would normally involve 3 upfront points higher. The level of risk is again at play here. Riskier loans can require as much as 10 upfront points. Private money lenders charge these points to increase the profits of the investors and cover for the time and resources that the private money lending organization has invested. The points will vary depending on the amount of the loan. For instance, a $400,000 private money loan may be charged with just 3 points, while a $40,000 loan may involve 10 upfront points.

Appreciating the Cost of Private Money Loans

To better appreciate the hefty price of private money loans, think of the opportunity loss you incur if you cannot go on with a deal because you did not get the loan. As an illustration, let’s say you buy handyman specials to fix and sell. Your funds afford you only three houses every six months which fetches a yield of $15,000 each. This means that your annual profit potential reaches its limit at $90,000 with only six deals per year. Enter private money. With a private money loan, you can use it to buy twelve houses instead of just six annually, doubling your profit to $180,000 per year. Simply put, the cost of not obtaining a private money loan is $90,000, assuming that everything goes according to plan.

Private money loans may be easier to obtain than traditional loans, but they levy higher interest rates and upfront points to compensate for the higher levels of risks involved which are often not entertained by traditional lenders.

 How Much Do Private Money Loans Cost
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