If you’re considering a personal or business loan to get you through a financial hardship, you need to know the difference between a bank and private lender.
Many people need financial help from time-to-time, and most commonly this is in the form of a loan. While there is a myriad of loan types on offer today, two of the most common include a standard bank loan and a private lender loan.
But what is the difference between these two loans and why choose one over the other? Let’s see how private lender differ from bank loans and the pros and cons of each:
How Do Private Lenders Work?
Private lenders are generally businesses or individuals looking to invest in sound business opportunities. In other words, they are in the business of making money, by lending money in the form of an investment. Check out your options for brilliant private lender access.
Private lenders are more entrepreneurial in nature, so the outcome of their investments vary. This means that a private lender can be a little more lenient when it comes to qualifying for a loan.
Private lenders have one main priority when lending money: mitigating risk. Some of the most important considerations they will look at when making an investment include: market value, borrower equity, and credit, additional collateral, pricing strategy, exit strategy, and due diligence.
How Do Traditional Bank Loans Work?
Banks are the largest lending institutions you can get and probably the first place people think of when considering a loan. This is especially true for businesses. Bank loans typically offer the lowest-cost financing, but they’re not always easy to qualify for.
Bank loans are often secured by collateral if you have a poor credit score or financial history. The interest rate on a bank loan is determined by your credit score, too. Bank loans must be paid back over a certain period of time, with regular payments usually deducted off your checking account each month.
If you qualify for a bank loan, this is one of the most affordable ways of maintaining cash flow for a business. It also allows you the opportunity to expand your business without huge loan repayments hanging over your head.
The Pros and Cons of Private Lender Loans
If you’re looking for fast access to a loan, turning to a private lender has its benefits. However, these types of loans don’t come without their own drawbacks. Here are the pros and cons to consider:
- Less Paperwork. In order to apply and qualify for this type of loan, most companies only require a valid ID, proof of income, and proof of address. This means there’s very little paperwork to put together, which takes less time to process. Overall, this makes the entire process quick and efficient.
- Fast and Efficient Approval. Private lending companies tend to work through loan applications quickly. This means you won’t have to wait weeks or months for a loan application to be approved. You simply apply, and generally have access to the funds you need within one or two days.
- A Short Repayment Period. One of the main drawbacks of this type of loan is the short repayment period. This means that repayment amounts could be quite steep each month. So, if you’re limited by a tight budget, the loan repayment amount may be out of your reach. To add to this, you could incur late-pay charges if you fail to meet the repayments on time.
- A Higher-than-Usual Interest Rate. Another negative about private lender loans is the high-interest rate on the loan. You could also be faced with service charges and other hidden fees that are often deducted from loan proceeds. If you have a poor credit history, this means that the interest rate on the loan will be even higher.
The Pros and Cons of Bank Loans
Bank loans may be harder to qualify for, but they’re a great option if you have a budget to work with and other important finances to manage. Here are some of the pros and cons to consider:
- Lower Interest Rates. A loan from the bank means that you will not get caught out by high-interest rates, when compared to short-term loans, and private lenders. Ultimately, this means that over time, you aren’t paying off an excessive amount. But rather, an amount that is manageable.
- Build Business Credit. Another bonus about bank loans is their manageable repayment terms that can usually be tailored to meet your budget. There are also no hidden fees or surprise deductions once you sign up for the loan; you know exactly what your monthly repayments will be.
- Tough Qualifying Terms. The terms of qualifying for a bank loan can be stringent,largely determined by your credit rating. If you have poor credit, this could make the process all-the-more difficult. In order to overcome this, you may be required to provide collateral for the loan, which then makes it a secured loan. Collateral could, for example, include your home or a car.
- Slow to Process. The reality is that the loan application process is a slow one with traditional lenders such as banks. There are also complaints that there’s a lack of transparency with regard to why applications are rejected. One of the most common reasons includes operating in an industry your bank doesn’t traditionally make loans to, as industries such as retail, real estate, and hospitality are often regarded as high-risk. The same goes for small, startup businesses. Banks are unlikely to loan to a business with less than two years of operating history.
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Hopefully, this summary has helped you get familiarized with each process. Once you understand them, you will be ready to make a truly informed and wise decision.
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A bank is the one i prefer