How Private Money Lenders Generate Funds and Income
Private Money Lenders such as hard money lenders provide short-term loans that usually run from 6 months to 24 months.
These loans are usually set up as interest-only payment loans which are amortized over 30 years.
The borrower should make a balloon payment at the end of the loan in order to pay back the principal.
These loans usually cover between 60 and 80% of the property’s ARV or after repaired value.
Private money loans have high interest rates with loan origination points, fees and other related charges.
This is how they make more money out of the loans and usually how most private money lenders work.
Income from Interest Rate
Private money lenders carry interest rates that range between 8% and 18%.
Some of the factors that determine the interest rate are the loan amount, the borrower’s credit score and the property’s after rehab value (ARV).
A borrower with a complicated credit history may be asked to pay with a higher interest rate in comparison to another who has managed to maintain a decent credit rating.
For instance, if a borrower makes an interest-only loan for $100,000 at 9% interest, the monthly interest income is $750.
Assuming that the borrower has a poor credit rating, the lender can charge 15% interest and earn $1,250 for each month.
Additional Costs and Fees
Private lenders make money from other related costs and additional fees.
For example, underwriting fees charged to evaluate a borrower’s ability to repay the loan will enable the lender to earn another $750 to $2,000.
Loan processing fee and document preparation usually add up several hundred more dollars to the bill and that accounts for additional income.
Other sources of income for private money lenders come from other fees and charges such as property inspections, notary and courier services.
Some private money lenders require collateral from their borrowers in exchange for funding.
In such cases, the private lender can draft a contract stating several conditions that pertains to the transaction and involvement of collateral.
If the borrower fails to make timely payments or is unable to repay the loan for some reason, the private lender has the prerogative to take the collateral.
However, this depends on what is on the contract or on certain conditions made by both the private lender and the borrower.