Private Money Loans Learning Center
Private construction loans are used to fund construction or improvement projects on real estate property. Although most commonly used by businesses, individuals can also use private construction loans for their own properties. The property offered as collateral can be residential or commercial, and the project can be anything from renovating a kitchen to building a large department store.
How Private Construction Loans Work
Unlike traditional construction loans, private construction loans are collateral-based or asset-based. This means they use the property involved as the collateral, instead of assessing the borrower’s eligibility through income and credit checks. This makes private construction loans a popular choice for people with insufficient credit history, or whose credit reports have negative marks such as foreclosures or bankruptcies. Banks don’t usually offer private construction loans—most lenders are individuals or small companies who focus specifically on these high-risk investments.
How Much Private Construction Loans Cost
Because borrowers present a higher risk, private construction loans charge higher interest rates to keep themselves covered in case their clients default. Typically, the interest rate for private construction loans is between 12% and 18%, around three times as much as a regular construction loan. Lenders may also charge origination fees as high as 10% of the loan amount and impose heavy penalties for late payments.
Depending on your project, private construction loans can finance up to 100% of the amount you need. This means you may not need to make a down payment. Once you’re approved, the funds are placed in a reserve account and given out in sections. This assures lenders that the money is being properly used and that the project is progressing as planned.
Why Should You Use Private Construction Loans
Private construction loans are obviously not the first choice if you want more out of your money. However, they might make more sense for borrowers who do not meet the requirements for regular loans, such as a good credit history and sufficient income. If you’re in financial trouble and need to complete a project fast, private construction loans may be a good solution.
Some companies also choose private construction loans for faster processing and more flexibility. For example, if a fast-growing company needs to build or expand its office, a bank loan may take them weeks or months to complete, slowing down their expansion. It may be worth it to pay high interest for private construction loans, which can take as little as three days and give them terms more suited for their operations.