Private money loans, also called hard money loans, are forms of non-bank financing. For those who can’t qualify for a bank loan, it can be disappointing to find out how high interest rates can go once you are out of the bank zone. Interest rates charged on non-bank loans vary from as low as 7% to as high as 18%. There are many reasons for this. Most lenders, whether bank or non-bank, attach higher interest rates with higher levels of perceived risk. For example, a borrower with bad credit is perceived as having a higher level of risk and so this borrower will be given a higher interest rate on a loan.
Hard money loan interest rates are not ruled by the same factors that affect bank rates.
1) Faster Loan Funding: Private money lenders can move much more quickly to fund on a loan than a bank. This short timeframe for underwriting a loan is perceived as adding a higher risk to the loan.
2) Credit and Income Independent: Hard money loan approvals are not credit or income dependent, as are bank loans.
3) Property Condition: Most banks won’t lend on a property that is in poor condition and/or vacant. A hard money loan is perfect for properties that require rehab. However because a rehab depends on a borrower’s ability to perform, these loans are perceived as higher risk.