Questions to Ask Your Private Lender

Sometimes, the need for money can force you to sign documents hastily without careful consideration. Your focus is spending the the money as soon as it lands in your account. The worst-case scenario is when you start paying the money back and realize that things aren't always as they seem. Whether you're borrowing from a bank or a private lender, there are crucial things you should know. So, what are the questions to ask your private lender? Follow through the discussion.

How Are You Capitalized?

The question of capitalization is probably one of the most important questions to ask your private lender. Capitalization is a money question that covers all the aspects of the level of financial stability of the lender.

If you're taking out a secured loan such as a mortgage or auto loan, the lender will have to hold your titles up until you complete your payments. Therefore, you'll feel more confident dealing with a financially sound company whose books are in order.

If it's a mortgage lender, do they have warehouse lines of credit from financial institutions? Have they taken out a collateralized loan obligation(CLO) or leveraged loans? Will they need a partner?

If they're lending you money for a project, they'll get a share of the returns and thus, are a partner. You should be aware of the probable risks for loans where you must make a deposit or contribution to the loan facility. In this situation, the lender uses the Loan-to-Value (LTV) ratio to determine your down payment. Most mainstream banks have an 80% LTV, whereby your contribution is about 20%. The LTV may be lower for private lenders, so you'll contribute more to the facility.

So, the private lender must be financially stable in matters to do with capitalization for your deposit is not at risk. You can also ask if they are investment managers with funding from insurance companies, hedges, or pensions. These are more stable, especially for mortgage facilities. You can also look at their licensing to determine whether they are state compliant. They must also successfully pass thorough background checks.

Notably, all lenders must originate loans, secure them with collateral like real estate, complete compliance training, and pass licensing exams under the Secure and Fair Enforcement for Mortgage Licensing Act of 2008(SAFE). Typically, a lender that complies with regulations will not have trouble getting capitalization to fund business operations.

How Are You Capitalized?

The question of capitalization is probably one of the most important questions to ask your private lender. Capitalization is a money question that covers all the aspects of the level of financial stability of the lender.

If you're taking out a secured loan such as a mortgage or auto loan, the lender will have to hold your titles up until you complete your payments. Therefore, you'll feel more confident dealing with a financially sound company whose books are in order.

If it's a mortgage lender, do they have warehouse lines of credit from financial institutions? Have they taken out a collateralized loan obligation(CLO) or leveraged loans? Will they need a partner? If they're lending you money for a project, they'll get a share of the returns and thus, are a partner.

You should be aware of the probable risks for loans where you must make a deposit or contribution to the loan facility.

In this situation, the lender uses the Loan-to-Value (LTV) ratio to determine your down payment. Most mainstream banks have an 80% LTV, whereby your contribution is about 20%.

The LTV may be lower for private lenders, so you'll contribute more to the facility. So, the private lender must be financially stable in matters to do with capitalization for your deposit is not at risk.

You can also ask if they are investment managers with funding from insurance companies, hedges, or pensions. These are more stable, especially for mortgage facilities.

You can also look at their licensing to determine whether they are state compliant. They must also successfully pass thorough background checks.

Notably, all lenders must originate loans, secure them with collateral like real estate, complete compliance training, and pass licensing exams under the Secure and Fair Enforcement for Mortgage Licensing Act of 2008(SAFE).

Typically, a lender that complies with regulations will not have trouble getting capitalization to fund business operations.

What is Your Approval Process?

The approval process commences from when you fill out an application, through appraisal to approval. You can ask if they'll give you a term sheet to update you on the behind-the-scenes process.

Even though the term sheet is not a binding contract, it shows that the process is moving well and helps you understand the lender's terms.

After the appraisal process, your loan is approved. Ask if there's a commitment letter that binds both you and the lender to the loan contract.

The length of time it takes to fund a loan is known as the loan tenure or term. When you sign the commitment letter, your lender will specify the loan term, along with the approved amount and interest rate.

Depending on the type of loan, the period may vary. For instance, mortgages can last up to 20 years, while personal installment loans have a maximum term of 12 months.

Short-term loan interest rates are greater than long-term ones. However, for long-term loan facilities, the total cost of the loan is higher.

The terms and conditions may be lengthy; however, it's essential to read everything and ask questions where you need clarification.

What's Your Sweet Spot?

Finding a sweet spot is the ultimate goal of closing the deal. You can ask this question to your private lender, which is the common ground between the amount you're borrowing and the repayment amount.

Lenders are in the lending business to make money, so they have their sweet spot. One of these parameters is what was mentioned earlier, the LTV or how much they're willing to deposit to your account versus your down payment.

Asking your lender about the cost of borrowing before accepting the loan offer is crucial. Most often, borrowers are duped into agreeing to the terms and conditions without being aware of hidden fees.

In order to entice customers, a lender may advertise cheaper interest rates. Even so, there may also be other fees, such as application fees, late payment fees, and early settlement fees.

Full disclosure is crucial in financial matters since it enables you to evaluate whether taking out the loan is justified in terms of costs and benefits.

Additionally, you can use the cost structure to compare many lenders and pick the one with the lowest fees.

Find out if the loan's interest rate is fixed or floating. Loans with fixed interest rates typically cost more when repaid early than those with fluctuating interest rates.

Conclusion

Notably, these are some of the questions you should ask your private lender when borrowing. Each borrower has unique needs, and the questions may vary depending on the type of loan product you are pursuing. Most importantly, don't accept a loan facility if you have any doubts. Inquire first because the devil is often in the details of the contract.