Private lending rates vary wildly—from 6% to 18% depending on lender, borrower risk, and loan structure. Before you commit capital or take on debt, you need to ask the right questions to understand what you're actually paying for. Here's your roadmap to evaluating private money and peer lending offers with clarity.
What's the Real Annual Percentage Rate (APR)?
Interest rate alone doesn't tell the full story. Ask lenders upfront for the APR, which includes fees, origination costs, and other charges baked into the annual cost. A lender quoting 10% interest might actually be charging 12–14% APR once you factor in points, documentation fees, and prepayment penalties. Request a detailed fee breakdown in writing and compare APRs across lenders, not just interest rates.
How Are Fees Structured?
Private lenders typically charge origination fees (0.5–3% of loan amount), underwriting fees ($500–$2,000), appraisal fees, and sometimes servicing fees. Some lenders fold these into the total cost; others charge them upfront. Ask whether fees are deducted from your loan proceeds or paid separately. On a $100,000 loan, the difference between a 1% and 3% origination fee is $2,000—material enough to shift your decision.
What's the Loan-to-Value (LTV) Ratio?
Private lenders typically cap LTV at 65–80% for real estate or business loans, meaning you need 20–35% equity or collateral upfront. Ask what LTV your lender will go to and whether that changes based on the collateral type, your credit, or market conditions. Higher LTV often means higher rates to compensate for increased risk. Understanding this upfront prevents surprises during underwriting.
Are There Prepayment Penalties?
Some private lenders charge penalties if you pay off early—typically 1–3% of the remaining balance or a set number of months' interest. This matters if you're bridging short-term or expect to refinance. Peer lending platforms often allow free prepayment, but private money lenders may not. Ask explicitly and get the prepayment clause in writing.
How Long Is the Underwriting Timeline?
Private lending moves faster than banks—typically 5–15 business days from application to funding, compared to 30–45 days with traditional lenders. However, speed varies. Ask about the underwriting process, required documentation, and realistic funding dates. If you're in a time crunch (e.g., a fix-and-flip with a 90-day runway), confirm the lender can deliver before committing.
What's the Loan Term?
Most private money loans run 6–36 months; peer lending terms typically range 3–7 years. Shorter terms mean higher monthly payments but lower total interest paid. Longer terms ease cash flow but compound interest costs. Ask whether the term is fixed or can be extended, and whether early payoff is possible without penalty.
What Collateral Is Required?
Understand exactly what you're pledging—real property, inventory, equipment, or personal guarantees. Ask about subordination (whether other liens take priority) and what happens if collateral value drops. Some lenders require additional reserves or hold funds in escrow. For peer lending, ask how your information is used and what happens if you default.
How Does the Lender Assess Risk?
Different lenders weight factors differently. Some focus primarily on collateral; others emphasize your credit score, income, or business track record. Ask how they calculate your rate and what credit or financial metrics matter most to them. This helps you understand whether you're getting a fair offer or should shop elsewhere.
What Happens in Default?
Ask about grace periods, late fees, and the lender's remedies if you miss a payment. Some charge 5% late fees; others report to credit bureaus after 30 days. For secured loans, ask the timeline and process for foreclosure or asset seizure. Knowing this upfront prevents nasty surprises.
Frequently Asked Questions
Q: Why do private lending rates vary so much more than bank rates? Private lenders assume higher risk, lack the regulatory backing of banks, and deal with borrowers who may not qualify for traditional financing; this volatility is reflected in rates spanning 6–18% depending on collateral quality, borrower profile, and market conditions.
Q: Can I negotiate private lending rates? Yes—particularly for larger loans ($250,000+) or strong collateral; however, peer lending platforms typically have fixed rates based on automated scoring, so negotiation room is limited there compared to direct private lenders.
Q: How do I compare private lenders fairly? Request detailed loan estimates (including APR, fees, term, and prepayment terms) from at least three lenders, then compare total cost of borrowing, not just headline rates; Mercoly helps you find and compare trusted private money and peer lending providers in one place to streamline this process.
Ready to find the right private lender for your situation?