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June 7, 2016

The Rise of the Private Lender

With the latest financial crisis, the world is seeing a marked change in home mortgage markets. Particularly noticeable in North America, the rise of the private lender is clearer than ever. Banks and other conventional lending bodies face stricter criteria and more stringent standards thanks to the crisis. Private lenders, however, are shifting the scales, even with high-risk borrowers on their hands. Despite recent real-estate prices, these financial daredevils are actually making quite the impact.

When banks reject borrowers, normally this would put an immediate cap on the borrower’s plans. Lately, it has become common to see a private lender step in and take their own risk by giving these borrowers a chance. Consequently, they stand to earn about 8% or more if the investment pays off.

With times being as tough as they are, people looking to take out second mortgages, for example, are turned down for bad credit. This means that their only redemption is the private lender. For the lender, this is high stakes. For the borrower, however, they have a second chance at settling their debts and getting on the task of repaying these private lenders. Of course this means that these borrowers often have to face high interests. The lenders, on the other hand, can earn as much as three times as much from this as a conventional lender might.

Along with high returns, lenders also stand to gain properties, as they are fully entitled to strip borrowers of their land if payments are not made. According to many of these private lenders, however, a lot of these individuals who take second mortgage & home loans are not at such risk. They claim the borrowers are capable of making payments on time, and are treated fairly. According to them, so many borrowers are turned down over minor issues, such as a lack of income documentation or moderately bad credit histories. They say that with a little experience, it’s not hard to tell when both lender and prospective borrower can reach a mutually beneficial situation.

Stringent criteria and protocols being as strict as they are, there’s just too much red tape for the average citizen to obtain a loan. This can even be when they have good credit histories and proper documentation. There is no flexibility for traditional lenders to give in. So it’s no surprise that private parties have gotten so heavily involved. These private lenders claim that, unlike their public counterparts, they offer far more flexibility. Even in cases where foreclosure has been necessary – payments rarely fall behind. Even when they do, it does not take long for the borrower to pay up.

The question of whether or not this is doing long-term damage or good for the parties involved (or even for the economy) is largely debatable. There is not much longitudinal data from which one can infer. This current trend does seem to point to another question that is more easily addressed, which is simply the matter of loan restrictions. Perhaps it is time to look into restructuring these procedures and criteria.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Item Reviewed: The Rise of the Private Lender Rating: 5 Reviewed By: EconMatters