Private money lending is when an individual investor, rather than a bank or mortgage company, provides a loan using their own personal capital. These loans are most common in real estate, where borrowers need fast funding or can’t qualify for traditional financing. The lender earns interest on the money they lend out, and the loan is typically secured by the property itself, giving the lender a claim on that asset if the borrower defaults.
Unlike a bank loan that goes through weeks of institutional underwriting, a private money loan can close in days. That speed, combined with flexible terms and fewer bureaucratic hoops, makes private lending attractive to real estate investors, house flippers, and developers. It also creates an investment opportunity for people with capital who want returns backed by tangible property.
How Private Money Lending Works
A private money loan starts with a borrower who needs capital, usually for a real estate purchase or renovation, and a lender who has funds to invest. The two parties negotiate the loan terms directly: the interest rate, the repayment schedule, the loan duration, and any fees. Because there’s no institution setting standardized terms, nearly everything is on the table.
The lender evaluates the deal primarily by looking at the property’s value relative to the loan amount. If a borrower wants $150,000 to buy a property worth $200,000, the lender is covering 75% of the value, which means there’s a 25% equity cushion protecting their investment if something goes wrong. This ratio of the loan amount to the property’s value, called the loan-to-value ratio (LTV), is the single most important number in private lending. Most private lenders cap LTV at 60% to 75% to ensure they have enough protective equity if they need to foreclose and sell the property.
Once both sides agree on terms, the deal is formalized through legal documents and the loan is funded. The borrower makes payments (often interest-only during the loan term) and repays the principal at the end, usually by selling the property, refinancing into a conventional loan, or completing the project and selling at a profit.
Who Uses Private Money Loans
The most common borrowers are real estate investors. Fix-and-flip buyers need fast capital to purchase distressed properties, renovate them, and sell within months. Traditional banks rarely move fast enough for competitive markets and often won’t lend on properties in poor condition. Private money fills that gap.
Developers use private loans to bridge the time between acquiring land and securing long-term construction financing. Small landlords sometimes use them to close on rental properties quickly, then refinance into a conventional mortgage once the property is stabilized. Borrowers with credit issues or unconventional income situations also turn to private lenders when banks decline their applications, since private lenders focus on the property’s value and the deal’s economics rather than the borrower’s credit score.
On the lending side, private money comes from individuals or small groups investing their own capital. These can be family members, friends, business associates, or individual investors looking for returns secured by real property. Some private lenders operate through self-directed retirement accounts, using IRA or 401(k) funds to make loans and earn tax-advantaged interest.
Typical Loan Terms
Private money loans are short-term by nature. Most run between 6 and 24 months, though some extend to three years for larger projects. Interest rates typically fall between 8% and 15%, depending on the risk level, the borrower’s track record, and the LTV ratio. A well-secured loan at 65% LTV to an experienced flipper might land at 9%, while a higher-risk deal with a first-time borrower could push past 12%.
Lenders also charge origination points, which are upfront fees calculated as a percentage of the loan amount. One to three points is standard. On a $200,000 loan, two points means $4,000 paid at closing. Some lenders charge additional fees for document preparation, inspections, or extensions if the borrower needs more time.
Most private loans are structured as interest-only with a balloon payment at the end. That means the borrower pays only the monthly interest during the loan term, then repays the entire principal as a lump sum when the loan matures. On a $200,000 loan at 10% interest, the monthly payment would be roughly $1,667, with the full $200,000 due at maturity.
Key Documents in a Private Loan
Private loans require proper legal documentation, just like any real estate transaction. The core documents include a promissory note, which spells out the loan amount, interest rate, payment schedule, and what happens if the borrower defaults. The second essential document is a mortgage or deed of trust, which attaches the loan to the property and gives the lender the legal right to foreclose if the borrower stops paying. This document gets recorded with the local county, creating a public lien on the property.
A well-structured private loan also includes a title search confirming the property is free of unexpected liens, hazard insurance naming the lender as an additional insured party, and an independent appraisal or broker price opinion establishing the property’s current value. Some lenders add personal guarantees, especially when the borrower is an LLC, so the individual behind the company is personally responsible for repayment.
How Lenders Protect Their Capital
The primary protection is the property itself. By lending at a conservative LTV, the lender ensures that even if the borrower defaults and the property needs to be sold at a discount, the sale proceeds cover the outstanding loan balance. A lender who loans $140,000 on a property worth $200,000 has a $60,000 cushion before they lose a dollar.
Beyond LTV, experienced private lenders evaluate the borrower’s exit strategy before funding. They want to see a clear, realistic plan for how the principal gets repaid. For a flip, that means reviewing the renovation budget, the projected after-repair value, and comparable sales in the area. For a refinance exit, they want evidence the borrower can qualify for a conventional loan once the project is complete.
Lenders also protect themselves through loan structure. Requiring interest reserves (where several months of interest payments are held in escrow at closing) ensures they receive income even if the borrower runs into cash flow problems early in the project. Financial covenants and draw schedules for renovation funds add layers of control over how the money gets used. Some lenders require amortization, meaning the borrower pays down principal over time rather than owing the full amount at the end, which gradually reduces risk as the loan matures.
Risks for Lenders and Borrowers
For lenders, the biggest risk is borrower default combined with a decline in property value. If a borrower walks away from a half-finished renovation and the local market softens, the lender may foreclose on a property worth less than what they lent. Foreclosure itself is expensive and time-consuming, often taking months or longer depending on the state.
Concentration risk matters too. A private lender who puts all their capital into one or two loans faces significant exposure if either deal goes bad. Diversifying across multiple loans and property types reduces this danger.
For borrowers, the cost is the main drawback. Double-digit interest rates and multiple points of origination fees make private money significantly more expensive than a conventional mortgage. If a project takes longer than expected, the interest payments add up fast, and many lenders charge extension fees or higher rates for overdue loans. A borrower who planned to flip a house in six months but takes twelve could see their profit margin evaporate.
Regulatory Considerations
Private money lending sits at the intersection of securities law, lending regulations, and state licensing requirements. If a private lender raises capital from other investors to fund loans, those investment arrangements may qualify as securities, which triggers federal registration requirements unless an exemption applies.
The most commonly used exemption is Rule 506 of Regulation D, which allows private offerings to accredited investors. To qualify as an accredited investor, an individual needs a net worth exceeding $1 million (excluding their primary residence), individual income above $200,000 for two consecutive years, or joint income with a spouse above $300,000 for two consecutive years. Holders of certain professional certifications, like the Series 65 license, also qualify. Rule 506(b) offerings can include a limited number of non-accredited investors who have sufficient financial knowledge and experience.
If you’re lending only your own money on a single deal, securities law is less of a concern. However, many states require a mortgage lending license if you make loans regularly, even with your own funds. The threshold for “regularly” varies. State usury laws also cap the maximum interest rate that can be charged, though many states exempt business-purpose loans from these caps. Before making or accepting a private loan, both parties should understand the licensing and disclosure rules in their state.
Private Money vs. Hard Money
The terms get used interchangeably, but they describe different sources. Private money comes from individual investors lending their own capital, often with a personal relationship or direct connection to the borrower. Terms are highly negotiable and tailored to the specific deal.
Hard money comes from professional lending companies or investment groups that specialize in high-risk real estate loans. These firms have standardized criteria, set rate sheets, and formal application processes. Their rates and fees tend to be higher than private money, reflecting their business overhead and the speed they offer. Hard money lenders can typically fund within days, which matters in competitive bidding situations. Both serve as alternatives to traditional bank financing, but the experience of working with an individual lender who knows you personally is very different from applying to a lending company with fixed underwriting guidelines.