There are several reasons a borrower is prepared to accept higher rates. Importantly, the higher rates do not imply the level of risk associated with the loan. Higher rates are the reward for the dynamic approach, speed and flexibility that a lender has to settle more quickly than traditional banks.
In many cases, borrowers might be eligible for bank funding but prefer Private Lenders because the complete package offered is a better fit for their needs.
The main influences on higher interest rates include the following.
Speed to Fund: where a fast response is critical, a borrower will pay more to ensure they get their funds to meet a specific deadline.
Term of the Loan: when a short term loan is required, borrowers will generally be required to borrow at higher rates from banks and private lenders.
Limited Options: traditional bank lending policies are inflexible and built for a mass market approach. Private lenders have more flexibility in the loans they are prepared to underwrite.
Credit Issues: traditional banks take a negative view of borrowers with adverse credit histories. Private lenders focus more on the transaction rather than the track record of the borrower. Private lenders take various criteria into consideration and are prepared to look past credit impairment issues.
Income Verification: most banks require proof of taxable income regardless of a borrower’s assets or the quality of the collateral securing the loan. People without taxable income or easily verifiable, consistent income (entrepreneurs and business owners) are often unable to obtain traditional financing and, therefore, seek financing at higher rates and with shorter terms from a private lender.