Private money lenders operate outside traditional banking channels, offering faster funding and fewer restrictions—but that freedom comes with higher costs and greater risk if you don't ask the right questions upfront. Before you sign, you need clarity on rates, terms, and the lender's actual track record. Here's what separates a solid deal from a financial trap.
What's the Actual Interest Rate and Fee Structure?
Private lenders charge significantly more than banks. You'll typically see rates between 8% and 15% annually, though hard money loans for real estate can hit 12% to 18% depending on your credit and the deal's risk profile. Don't stop at the headline rate—ask for the total cost breakdown: origination fees (usually 1% to 5% of the loan amount), underwriting fees, appraisal costs, and prepayment penalties. Some lenders bury yield spread premiums or broker fees that add another 2% to 3% to your actual cost. Request a full loan estimate in writing before committing.
How Long Is the Loan Term and What's the Repayment Schedule?
Peer lending platforms typically offer 3 to 7-year terms with fixed monthly payments, while private money for real estate deals often runs 6 months to 3 years with balloon payments at the end. Ask explicitly: Are payments interest-only during the loan period? Is there a balloon—and if so, how much? Can you prepay without penalty? A $50,000 loan with interest-only payments might cost you just $500 monthly, but if $45,000 is due in a lump sum in two years, your refinancing options matter enormously. Get the full amortization schedule in writing.
What Are Their Default and Late Payment Policies?
Understand exactly what happens if you miss a payment. Most private lenders charge 5% to 10% late fees after 10 to 15 days, and many have acceleration clauses that trigger full repayment if you're 30+ days late. Ask whether they offer any grace periods, fee waivers for first-time late payments, or loan modification options if your circumstances change. Some peer lending platforms are stricter than others; if you're borrowing through a platform like Prosper or LendingClub, their policies are standardized, but direct private lenders may negotiate.
Can You Verify Their Licensing and Track Record?
This is non-negotiable. Ask for their NMLS number (Nationwide Mortgage Licensing System) if they're lending on real property—you can verify it at nmlsconsumeraccess.org. Request references from at least three recent borrowers and actually call them. Ask those references how long funding took, whether the lender was transparent, and if they'd use them again. For peer lending, check ratings on the platform's website and read borrower reviews. Mercoly helps you compare and find trusted private money and peer lending providers in one place, making verification easier.
What's Your Funding Timeline?
One major advantage of private lending is speed. Ask: How quickly can you fund after approval? Most hard money lenders close in 7 to 14 days; peer lending typically takes 3 to 7 days. Confirm whether that timeline is guaranteed or contingent on appraisals, title work, or additional documentation. If you're buying a foreclosure and need capital in 5 days, you need confirmation in writing, not a verbal estimate.
What Collateral or Personal Guarantees Do They Require?
Private lenders almost always want collateral. For real estate deals, it's the property itself. For peer lending, it's unsecured—but your credit matters. Ask directly: What's the loan-to-value ratio they'll accept? (Hard money lenders typically max out at 70% LTV.) Will they require a personal guarantee if you're borrowing through an LLC? Do they take liens on other assets? Understand your risk exposure if the deal goes sideways.
Frequently Asked Questions
Q: Is private lending legal, and what regulations apply? Yes, private lending is legal and regulated, but the rules vary by state and loan type; hard money lenders must comply with RESPA and Truth in Lending Act (TILA) for mortgages, while peer lending operates under SEC and state lending laws.
Q: How does my credit score affect private lending options? Private lenders focus more on collateral and deal strength than credit scores, so you may qualify even with poor credit—but expect higher rates; peer lending platforms do use credit scores and may decline you below 600, though some specialize in bad-credit borrowers.
Q: What's the difference between hard money and peer lending? Hard money is direct lending from private investors or companies for real estate deals (faster, more expensive), while peer lending matches individual borrowers with multiple individual investors through online platforms (more regulated, standardized terms).
Compare providers side-by-side to find the best fit for your timeline, budget, and risk tolerance.