There are a few common risks to avoid when you want to borrow money from a money lender. Though all the money lenders are not dubious chances are still there that the so-called ‘bad egg’ private lenders exist in the money lending landscape. It is these money lenders that you should avoid.
There are several reasons that you should avoid or at least be cautious when you borrow from the private money lenders.
First, they are so small in operation, even smaller than the credit unions, that they are often exempted from the standard regulatory scrutiny. Therefore, chances are high that they may follow some unfair practices.
- In order to prevent from being a victim of such practices, you should do your own due diligence even if you know that the particular private lender operates according to the industry best practices.
- Your due diligence involves thorough research which is the key to alleviate the biggest risks of hard money.
Some say that it is rare but still you will have to research about the company based on the name under which it works in terms of servicing the loan as well as vesting the loan.
Your research should include:
- Asking for references
- Speaking with the previous borrowers as well as those the lender is currently servicing and
- Reviewing the loan terms as well as the contract very carefully
Whenever possible you should take along an attorney to review the terms and contract but make sure that the attorney is familiar with the working process and practices followed by the private lenders.
Know your state laws
It is also necessary that you know your state as well as the federal rights so that you know and choose the right type of loan according to your need.
- This is important because once you take on a loan and sign on the contract paper there will be no recourse if something unexpected happens or goes wrong.
- The research will also help you to see how many properties that the loan service provider has foreclosed on before.
You can research on the internet or go to the country courthouse and when you know these facts you will
- You must at all cost avoid such lenders that has foreclosed several accounts because a lender having high foreclosure rates may often follow unscrupulous lending practices.
- It is also possible that the lenders have a little threshold of patience when it comes to delinquent payments.
Therefore, search all available directories to source the potential lenders who are faithful towards their customers such as https://www.libertylending.com/ and others of its likes. This will provide you with an extra layer of reassurance. In fact, there is nothing better than research that can replace due diligence.
Look for an affordable loan
There is a chance that you will be allured by offers that will eventually make you agree to a loan that you cannot afford. This is another risk that you should avoid given the fact that private money is a lack of safeguards.
It is assumed that the lenders trust their customers and expect that they know how much of a loan they can afford.
Ideally, banks will consider your credit score and take a close look at several different factors that will help them to:
- Determine your creditworthiness
- How the loan will impact your ability to repay a loan
- Your income sources and stability and even
- Your lifestyle by simply looking at your bank statements.
One of the largest factors that will determine your affordability for a loan is your debt to income ratio. This ratio will let the lenders know how much money you owe on every loan that you have taken from different lenders that may include everything from your credit cards, student loans, car loans, mortgages and others in relation to your monthly income.
On the contrary, private lenders are often less stringent regarding these factors. This means they will offer you more amount as loan even knowing that you may not be able to repay it.
Being responsible about your loans and to avoid dire consequences in the future you must know your limits, your budget and consider everything right from your outstanding loans to your lifestyle as well as the money you can afford to spend.
Reviewing and understanding the loan terms
One of the most common mistakes the borrowers make is that they do not review and do not understand the loan terms before they sign on the contract. They gradually come to know about the hidden clauses and terms when the matters are already out of control.
- It is this lacking in the borrowers that the private lenders take advantage of and move heaven and earth just to close a deal. They will portray you will get much more flexibility and gain a lot from the loan. It is their personal touch that you will fall for.
- However, all these will be done on their terms and for their profit, and it will eventually put you at a higher risk. You will have to meet terms than you expected.
In addition to that, private money lending nature is typically for business purposes. This means they will not be very keen on following the consumer protection guidelines much unlike any traditional and reputable money lender or money lending company. Unlike banks, private money lenders will not have industry standard loan terms.
Checks to make
Therefore, in order to avoid the risks of borrowing, you must check for a few things such as, whether or not you are able to make the balloon payment, follow the loan terms, know-how quickly foreclosure can progress and also know about all the non-monetary covenants that you must maintain. This will help you to choose a loan that you can really afford to pay back. Also, expect a few changes down the line because loan rates and fees will pay a significant role in determining the final amount that you will pay on your loan.