Private money and bank loans serve different borrowers—but the cost gap is often steeper than people realize. If you're comparing options for a real estate investment, business expansion, or quick capital access, understanding the actual numbers is critical. This guide breaks down what you'll genuinely pay with each option.
The Interest Rate Gap
Bank loans typically range from 3% to 8% for qualified borrowers with solid credit and collateral. Private money lenders charge 8% to 15%, sometimes higher depending on risk and deal structure. That 5–7 percentage point spread translates to real dollars: on a $300,000 loan over five years, the difference between 5% and 12% is roughly $45,000 in total interest paid.
Private lenders justify higher rates by accepting deals banks won't touch—less seasoned investors, non-traditional properties, or shorter timelines where underwriting risk is concentrated.
Points, Fees, and Hidden Costs
Banks charge origination fees (0.5% to 1.5% of loan amount) plus appraisal, title, and processing fees that can total $5,000–$15,000 on a typical mortgage. Private money lenders typically charge "points"—1 to 3 points upfront, where one point equals 1% of the loan amount. A $200,000 private loan at 2 points costs $4,000 immediately.
Beyond points, expect:
- Underwriting or evaluation fees: $500–$2,000 (often applied toward points if the deal closes)
- Due diligence or appraisal costs: Private lenders may require their own appraisal ($400–$800)
- Exit fees or prepayment penalties: Some private lenders charge 1–3% if you repay early; banks rarely do
- Servicing or administrative fees: Monthly charges of $25–$100, uncommon with banks
The total upfront cost with private money often runs 3% to 5% of the loan amount, versus 2% to 3% with banks—but the faster funding timeline (3–7 days vs. 30–45 days) saves carrying costs on real estate deals.
Term Length and Flexibility
Bank loans lock you into 15- or 30-year amortization schedules. Private lenders commonly offer 12-month to 5-year terms, with balloon payments covering the full balance at maturity. This suits fix-and-flip investors who plan to exit or refinance within 2–3 years.
If you miss your exit timeline and can't refinance, you're stuck. Extending a private loan typically costs an extension fee (1–3% of remaining balance) and higher interest on the rollover. Banks, conversely, allow long-term stability but demand lengthy underwriting and won't fund unconventional properties.
Down Payment and Collateral Requirements
Banks require 15% to 25% down for investment properties; some require 30%. Private lenders often accept 20% to 30% down, but some will go lower (15%) on strong deals. However, they scrutinize the property and your experience more aggressively than your credit score.
Collateral requirements differ too: banks lend on appraisal value and debt-to-income ratio. Private lenders emphasize the property's after-repair value (ARV) for fix-and-flips, or cash flow for rentals—a riskier framework that justifies higher rates.
Speed and Approval Standards
Bank loan approval takes 30–45 days and requires extensive documentation: tax returns (two years), bank statements, employment verification, and a full appraisal. Private lenders close in 3–10 days with minimal documentation—often just an application, property details, and an exit plan.
For time-sensitive deals (auction properties, competitive off-market offers), private money wins decisively. You'll pay more in interest, but you secure the deal while competitors wait for bank approval.
When Each Option Makes Sense
Choose bank loans if: You have strong credit, a conventional property, 20%+ down, and can wait 6–8 weeks. You'll pay substantially less over time.
Choose private money if: You need capital in days, the property is non-standard (commercial mixed-use, value-add multi-family), you're a newer investor, or you have a clear 12–36 month exit strategy.
If you're torn between options, platforms like Mercoly let you compare and connect with trusted private money lenders alongside conventional mortgage brokers, so you can see real rates and terms side-by-side from vetted providers.
Frequently Asked Questions
Q: Can I refinance a private money loan into a bank mortgage to reduce interest? Yes—this is a common exit strategy. Once you've stabilized a property or improved your profile, refinancing to a conventional loan at 5–7% saves thousands annually, though you'll pay bank closing costs again ($5,000–$15,000).
Q: What's the actual cost difference on a $250,000 loan over two years? Bank loan at 6% with 1.5% origination costs you roughly $15,750 in interest and $3,750 in fees. Private money at 12% with 2 points costs about $31,500 in interest plus $5,000 in upfront points—roughly double—but closes in one week instead of six weeks.
Q: Do private lenders check my credit score? Minimally. Most care far more about your equity cushion, property condition, and exit plan than your FICO score. You'll qualify where banks reject you outright.
Compare quotes from multiple private lenders and banks using Mercoly to find the lowest-cost option for your specific deal timeline and risk profile.