What is Private Money?

Malcolm Tatum

"Private money" is a term used to describe funds that are made available through loans to companies and individuals by a private entity. Lenders of this type are often able to make loans without the need to observe all the regulations that are required of lenders like banks or finance companies. This means that lenders of private money may apply rates of interest that are different from the current average rates and may also require terms of repayment that are unlike those issued by public lenders.

Private money lenders are not beholden to banking regulations.
Private money lenders are not beholden to banking regulations.

The lending of private money may involve two individuals, an individual and a company, or two companies. In any of these scenarios, the qualifications for obtaining the loan will vary, sometimes based on the relationship that exists between the two parties. For example, if the company has a long-standing relationship with the individual that has been mutually satisfying in the past, the company may extend a loan to the individual even when banks and similar institutions will not. In the case of two individuals, one may choose to lend the other money to make some sort of purchase or investment, such as buying a home, without the need to go through a bank.

Terms and conditions for repayment of private money will vary, depending on the arrangements agreed upon by the two parties. In some cases, those terms may be considerably more liberal than those offered by banks. At other times, the extension of a private money loan may include provisions that are more detailed and rigid than those offered by banks. This sometimes happens when the lender perceives that the risk level is considerable, making it necessary to invoke additional requirements to help mitigate that risk to some degree. For example, the lender may require the pledging of collateral that can be seized if the borrower misses even one payment.

While private money lending is common in many areas of the world, it is important to consider both the benefits and the potential drawbacks to this arrangement. Depending on how the terms and conditions that are applied to a given private money loan, the borrower may or may not enjoy the same level of consumer protection afforded by doing business with a bank. For this reason, it is extremely important to consider each aspect of the private money lending and make sure this strategy is the best possible solution before actually entering into a working agreement with a private lender.

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