There are many reasons a borrower may accept a higher rate, including:
- Speed: Private lenders are able to underwrite the loan for the borrower much more efficiently than a bank. Borrowers may need access to capital quickly to meet a closing deadline or they may choose to use this quick capital private lenders can provide rather than wait for a traditional lender to complete their long underwriting process.
- Fewer options: Many banks make it an internal policy to not give loans to borrowers whose primary business consists of fixing and flipping houses. For this reason, many of our borrowers have limited options outside of seeking private loans.
- Credit: Due to current banking regulation, it may be even more difficult for borrowers with prior credit issues to get a bank loan. They may be required to put up additional collateral or equity even if they are well-capitalized to make loan payments. Borrowers may, therefore, approach a private lender who can step in and offer the same desired loan but at a higher rate.
- Income Verification: Most banks require proof of W2 income regardless of a borrower’s assets or the quality of the collateral securing the loan. People without W2 income or easily verifiable, consistent income (entrepreneurs, business owners, etc.) are often unable to obtain traditional financing and, therefore, seek financing at higher rates and with shorter terms from a private lender.
- Headache: Bank regulation is so stringent and makes getting a loan extremely onerous for many borrowers. Private lenders can work more efficiently and help high-quality borrowers get the funding they need. This sort of ease leads borrowers to be willing to take out loans at higher rates.