Private Lenders vs. Banks for Borrowing Money: Pros and Cons

The sad reality we face today is that most Americans don’t have the money they need when they need it. In fact, many American families operate on a paycheck to paycheck basis, just barely getting by.

There may be certain instances in life where you’re forced to provide financial resources that you don’t have in your own possession. It might be to cover certain debts, to secure an investment, or to start a business.

In these scenarios and more, it’s likely that you’ll need to secure funds from an outside source, such as a bank or private lenders. What’s the difference between borrowing from banks as opposed to other lenders, and what are the advantages to either?

If you’re trying to determine where to get your next loan from, read on. We’ll walk you through the important information you need to know.

The Benefits of Borrowing from the Bank

When people first start looking into borrowing money, the bank is almost always the first place that their attention turns to. Why is this? Why is everyone after a bank loan?

There’s a variety of reasons. The most essential is the interest rates involved. In most cases, a large financial institution like a bank is able to offer lower interest rates than other sorts of money lenders.

This is because a bank has a great deal of money going in and out, and are very selective about who they grant loans to. They mitigate risk in this way and can offer lower interest rates as a result.

People also tend to flock to banks for loans thanks to their reliability and convenience. You already likely keep a good deal of your money with a particular bank. It makes a lot of people feel more comfortable to do business with an entity that they already operate with.

A large recognizable brand is seen as more trustworthy by many Americans. The reliability of such a large institution is seen as a big advantage to many money borrowers.

There’s also likely a local branch near your home, meaning the convenience of borrowing from a bank is hard to beat.

Disadvantages of Borrowing from the Bank

Unfortunately, the rosy-tinged view of banks as ideal money lenders isn’t always the reality that many Americans face. The truth is that it can be very, very difficult to get a bank to get you a loan at all.

Especially in recent times, banking institutions have become notoriously risk-averse. Even if you have a good credit score, it might be hard to secure a loan for any of the major banking companies.

If your credit score isn’t so good? You can probably forget it.

You might need to present mountains of paperwork and evidence in order to convince the bank that you’re someone worth lending money to. Not only can this be stressful, but it can eat up quite a bit of time.

That’s time that many people that need money fast don’t have. Too many Americans can’t wait through the lengthy application and approval process most banks offer.

Plus, while banks have the opportunity to give loans with small interest rates, they don’t always actually do this. Banks want to make money too, and they often still present loans with interest rates that can make many borrowers sweat.

What kind of deal you get from a bank (if you get one at all) will really depend on the particulars of your situation.

Benefits of Borrowing from Private Lenders

There are many different kinds of private lenders out there. These private lenders understand how unwelcoming many banks can be to those who need funds. Many intentionally position themselves as positive alternatives to that form of borrowing.

How so?

For one, many private lenders have streamlined the application process. Many have trimmed down their paperwork to the bare essentials, and many will allow you to apply online.

The approval process has been sped up so that you can get the money you need right when you need it, not later. There are many direct hard money lenders who can get funds into your account within a 24-hour window.

There are also so many different kinds of private lenders out there, you can almost always find one who is equipped to handle your personal financial situation. Have a bad credit score?

There plenty of lenders who are willing to work with those who have poor credit. No matter what your situation is, someone likely specializes in lending money to people like you.

Disadvantages of Borrowing from Private Lenders

In order to prove this ease and flexibility, many private lenders have to charge interest rates that are higher than what you might find at your local banking institution.

These lenders know they’re taking on a risk, and the riskier your profile is, the more you’ll likely have to pay in interest. That’s the only way these private lenders are able to stay in business.

Private lenders may also offer shorter-term loans than what a banking institution normally would. This can make it more difficult to make your payments on time.

Borrowing from Banks vs. Private Lenders

If you’re making a big purchase or investment, you might need to take a loan out. Where should you borrow money from: banks or private lenders? The above information lays out the advantages and disadvantages of each option so you can better make a decision.

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