What Is a Private Money Loan and How Does It Work?

A private money loan is money lent by an individual or a small private group rather than a bank or credit union, using the property itself as security and your deal as the story. The lender might be a family member, a wealthy acquaintance, or a local investor who lends for a living, and the terms are negotiated directly instead of through a loan application.

Private lenders care more about the deal than your credit score: the property's value, the gap between purchase and resale or rental value, and your plan. That makes private money a fit for situations banks move too slowly for, especially fix-and-flips and time-sensitive purchases.

It is also how many first flips get funded, because a bank will not lend on a house that is falling down, while a private lender will, if the numbers show the finished value.

Private loans are typically short-term, interest-only, and more expensive than bank money, often priced as a monthly interest rate plus points at closing. Terms commonly run six to twenty-four months, which suits a flip or a quick refinance rather than a long-term rental mortgage.

Interest rates vary widely based on the lender and the deal, and are almost always higher than a conventional rate because the lender carries more risk with fewer protections. Points, an upfront fee as a percent of the loan, are common.

The upside is speed and flexibility: closings can happen in days or weeks, deals that banks refuse can be funded, and terms like interest-only payments keep your cash available for the renovation.

Private money and hard money are sometimes used interchangeably, but they differ in who lends and how the deal is priced: private lenders are individuals you often know, while hard money lenders are companies lending professionally at set rates. Hard money rates and points are standardized and public; private terms are whatever you negotiate.

Both are short-term, asset-based, and expensive compared with bank financing, and both expect a clear exit: you will sell, refinance, or pay the loan off within the term.

For a borrower, a private loan from someone you know can be more flexible on hard times, with a phone call instead of a servicing department, but mixing money and relationships means the agreement needs total clarity in writing.

Borrowing private money responsibly means putting the whole deal in writing, including the interest rate, points, repayment schedule, late provisions, and what happens if you cannot pay. A handshake is a lawsuit waiting to happen, even between friends, especially in real estate where the sums are large.

Get a formal promissory note and a mortgage or deed of trust recorded against the property, usually drafted by an attorney, so the lender has real security and you have clear terms.

Have a realistic exit plan before you sign: the sale price, the refinance amount, or the savings that will repay the loan. If the only exit is hope, the deal is not ready for private money yet.

Private lenders price their loans on the property and the deal rather than your credit, and the practical result is a higher cost than bank money: expect a higher interest rate, points at closing, and a shorter term, in exchange for speed and flexibility. Loan-to-value on private deals usually runs lower than bank financing, often 60 to 75 percent of the purchase price or after-repair value, because the lender's protection is the property itself.

Points are front-loading: one point is one percent of the loan and is due at closing, so on a $150,000 loan a two-point deal costs $3,000 before you start. Add the points to your acquisition cost when you underwrite the flip or refinance exit.

Interest-only payments are common on shorter terms, which keeps your cash available for the renovation but means the principal is not shrinking, so the exit must be a sale or refinance within the term.

Ask about prepayment penalties in writing. A lender who charges a penalty can turn a fast sale into a costly one, and the penalty, the points, and the rate together decide whether private money is expensive or ruinously expensive.