Private money lenders offer faster capital than traditional banks, but the flexibility comes with steeper costs and shorter repayment periods. Understanding what you'll actually pay—and what terms to expect—is crucial before you commit to this financing route. This guide breaks down the real costs and deal structures you'll encounter.
What Private Money Actually Costs
Interest rates on private loans typically range from 8% to 15% annually, though some deals hit 18% or higher depending on risk, loan size, and your credit profile. Unlike bank loans, private lenders focus less on your credit score and more on the asset backing the loan (collateral value, cash flow projections, or exit strategy).
Beyond interest, expect origination fees of 2% to 5% of the loan amount, charged upfront. Some lenders also charge broker fees (1% to 3%) if you're working through an intermediary. Points—prepaid interest—may add another 1% to 3%. These stack up quickly on larger loans.
For a $250,000 private loan at 12% interest with a 3% origination fee, you're looking at $7,500 in upfront costs plus roughly $30,000 in annual interest. Calculate the full cost before signing.
Typical Loan Terms & Structures
Most private loans are short-term, ranging from 6 months to 5 years. Hard money lenders (a common type of private lender focused on real estate) typically offer 1- to 3-year terms. Bridge loans, used to cover gaps between property purchases, often run 6 to 18 months.
Repayment structures vary:
- Interest-only payments during the loan term, with principal due at maturity
- Amortized payments (principal + interest monthly), similar to traditional mortgages but compressed into shorter timeframes
- Balloon payments, where you pay interest regularly but a large chunk of principal is due at the end
- No payments until maturity, where all costs accrue and you settle everything upon exit (common in fix-and-flip deals)
Many private lenders require you to have "skin in the game"—typically 20% to 30% equity or cash invested before they'll fund. This protects their position and shows your commitment.
Where the Money Actually Comes From
Private lenders fall into distinct buckets. Hard money lenders are businesses or entities that lend their own or pooled capital, primarily for real estate. Peer-to-peer platforms connect individual investors with borrowers; loans are fractured among many micro-investors. Private individuals (friends, family, or wealthy acquaintances) provide direct capital, sometimes with informal terms.
Each source carries different flexibility. A hard money lender has preset criteria and faster closings (5-10 business days). Peer platforms take longer (2-4 weeks) but offer standardized terms. Individual investors may be flexible on structure but require stronger personal relationships and clearer legal documentation.
Red Flags & Protective Steps
Not all private lenders operate legitimately. Watch for lenders who demand upfront fees before funding, guarantee approval, or avoid explaining the full fee structure. Legitimate lenders disclose everything in writing and provide loan documents before closing.
Always get a lawyer to review loan agreements—non-negotiable. Hire an accountant to model the actual cost across your repayment timeline. If you're borrowing for real estate, get a property appraisal; lenders use loan-to-value (LTV) ratios to decide how much they'll fund. Most require 70% LTV or lower, meaning you're putting down at least 30%.
Check whether the lender is regulated. Some states license hard money lenders; others don't. Peer platforms are typically registered with the SEC. Individual lenders operate in a gray zone but should still provide formal promissory notes and UCC filings (if secured by assets).
Finding the Right Fit
The cheapest option isn't always the best. A slightly higher interest rate from a lender who closes fast and understands your business model may save you more than haggling with someone slow or inflexible. Platforms like Mercoly let you compare and review trusted private money and peer lending providers in one place, making it easier to vet multiple options simultaneously.
Document your business plan clearly. Lenders want to understand how you'll repay—whether it's rental income, sale proceeds from a flip, or business revenue. Stronger plans attract better rates.
Frequently Asked Questions
Q: Can I refinance a private loan into traditional financing later? Yes, many borrowers use private money as a bridge to stabilize or improve an asset, then refinance into a bank loan at lower rates once the property or business is in better shape.
Q: What happens if I miss a payment on a private loan? Terms vary widely, but most private loans allow a 10- to 15-day grace period before late fees kick in. Defaults can trigger acceleration (entire loan due immediately) or foreclosure if the loan is secured by real estate.
Q: How do I know if private money is cheaper than a small business loan? Compare the all-in cost: interest + fees + opportunity cost of faster closing. Private money often costs more annually but saves money if speed prevents you from missing a business opportunity or reduces bridge financing needs.
Start by comparing lenders on Mercoly to see what actual terms and costs align with your timeline and risk tolerance.