Finding urgent financial aid can be stressful. Most would go to their bank for a loan to start a business or to buy a new car, however banks will be of little help if you don’t have a good credit score. A private lender is willing to give you the necessary funds through a quick and simple process without the red tape associated with Canada’s chartered financial institutions. Private lenders usually require you to sign a contract that offers your property as collateral because of the lack of a credit check, however you can expect to see the funds within a few days of the approved application. If you need cash fast, but have bad credit, the insights below will tell you all you need to know about finding a personal loan from a private lender.
Using a Private Lender
You will probably start your search for a loan on Google, but most first page results are a mixture of direct lenders and lead generation sites that simply compile your information to send to lenders. Always deal directly with the private lender to avoid the inevitable solicited emails and phone calls from the lead generation sites.
A private loan should only be considered when traditional bank loans are not an option. Although private loans are similar to loans offered by chartered banks, there are stark differences. Private financial institutions are not insured. This clears red tape associated with the compliance departments of big banks. It will also ensure a faster closing of the loan agreement and should expect to see the funds in your account within 1-3 days. Banks have become increasingly stringent on their requirements to qualify for a loan, leaving many Canadians having to turn to private lenders. In fact, 2016 is expected to be a great year for private lenders thanks to new regulations, meaning lower borrowing rates due to competition.
There are two types of private lenders: secure and unsecure. A secure lender will seek collateral such as a house or car to ‘secure’ the loan if the recipient defaults. In order to start the loan agreement, the private lender will require a deed of trust, which converts your property into collateral and a promissory note, which is a simple document signed by the property owner that he/she promises to repay the private loan. A third party brokerage such as North Creek Financial will act as trustee of the property if the borrower defaults, then has to the power to sell the property to secure the funds. However, the brokerage cannot control the property as long as the borrower fulfill their obligations in the loan agreement.
Interest rates at banks tend to be lower, that’s why many small business owners will seek a loan from their chartered institution first. Those self-employed often believe their bank is the only option they have to receive a loan to grow their business. Banks are able to keep interest rates low because they have a pool of depositors that keep most of their money in their checking and savings accounts. When it comes to private lenders, they rely on a group of investors or the big banks who lend funds, but want to see a decent return on all loans, therefore interest rates are higher to cover overhead costs. Private lending is an industry that has long had stigma attached, but unjustifiably so. Lending practices in Canada are very strict and federally regulated. In fact, private loans are ideal for new Canadians, self-employed and those going through a foreclosure because you pay in small installments with reasonable interest rates rather than having to pay rates as high as 700% in annuities with payday lenders.
Most lenders can offer you a loan up to $5,000, however other private lenders may be willing to offer more. The loan payback period is also flexible and the lender could stretch it as far as 36 months, depending on your comfort level. Interest rates will be fixed and payments will be on a fixed monthly basis. There is also the actual cost of the loan. Banks charge 6% annually, whereas a private lender may have rates as high as 10% to 17%. Prepare for the private lender to seek a short payback period as they want to see a quick return as their pool of funds is limited unlike banks. If you still haven’t decided what mortgage is best for you, try this handy mortgage calculator.