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Guide to Private Lenders and How They Work

What Are Private Lenders & How Do They Work?
Sulaiman Abdur-Rahman
Sulaiman Abdur-RahmanUpdated October 23, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Private lenders are individuals, professional investors, or nondepository financial institutions that offer loans as a nonbank operation. Borrowers can go to private lenders for a variety of financial products, including mortgages, personal loans, and small business loans.Unlike banks, credit unions, and thrift institutions, private lenders offer financial products without taking deposits from customers. Private lending may occur in person or online through fintech platforms that provide alternative financial services.Below we explain how private lending works and highlight the differences between private lenders vs. conventional lenders.

What Is a Private Lender?

A private lender is an individual investor or nonbank financial institution that offers loans without taking monetary deposits from customers. Private lenders can be private lending companies or private individuals.

Private Lending Company

A private lending company is a nonbank financial institution that may offer loans to people and businesses without accepting monetary deposits from customers. Here are some examples of private lending companies:
  • Financial technology or fintech groups
  • Private equity firms
  • Venture capital firms
  • Hedge fund managers
  • Business development companies
  • Investment managers

Individual Private Lender

An individual private lender is any person who offers loans to any consumer or business. Here are some examples of individual private lenders:
  • Venture capitalist
  • Private equity investor
  • Angel investor
  • Peer-to-peer lender
  • Personal investor
  • Retail investor

How Do Private Lenders Operate?

Private lenders operate as investors or nonbank financial institutions providing loans to consumers or businesses. Some private lenders, such as fintech companies, may partner with banks to offer loans through a digital lending platform.Private lenders may review a borrower’s credit history and debt-to-income ratio when determining whether to approve or deny the borrower’s loan application. These lenders may offer loans with terms and conditions requiring borrowers to repay the loan over a set period with interest.Other private lenders, such as venture capitalists, may offer funding to entrepreneurs. A venture capitalist may sign a contract with an entrepreneur stipulating the amount of funding the entrepreneur will receive in exchange for some equity ownership of the entrepreneur’s startup.

What Sorts of Loans Are Offered by Private Lenders?

Private lenders may offer the following financial products:


A mortgage is a loan that can help you buy a home. Private lenders can offer mortgage loans to consumers. When considering finance options all about mortgages, consumers may consider mortgage loans with fixed rates of interest or variable rates of interest.Private lenders may also offer unconventional financing and collateralized loans secured by commercial real estate, which is what hard money personal loans are.Ways to find a private mortgage lender include asking friends and family members or using a company that offers private financing. Keep in mind, though, that this form of borrowing is oftentimes more expensive than getting a traditional mortgage through a mortgage broker, bank, or online lender.

Property Refinancing

Property refinancing is replacing an existing mortgage with a new loan. Private lenders may offer property refinancing products to homeowners and commercial property owners.First-time homebuyers can compare mortgage rates when looking to buy a home, while current property owners with existing mortgage obligations can consider refinancing.Typically, refinancing with a private lender is a much shorter process than through a bank. Qualifications aren’t as stringent, as private lenders aren’t as concerned with credit history or the nitty-gritty details of your finances.

Personal Loans

Personal loans are consumer lending products that provide borrowers with a lump sum of money that borrowers may repay over the life of the loan’s term. Private lenders may offer online personal loans up to $100,000.Unsecured personal loans do not require collateral, while secured personal loans require borrowers to pledge an asset as collateral. A borrower’s vehicle or savings account deposits can serve as collateral. Some lenders may offer personal loans for people on disability benefits.If you need a small personal loan, consider asking a family member or friend. While personal loans from banks and online lenders offer competitive interest rates, a family member or friend may charge you even less in interest or no interest at all. Keep in mind, though, that if you are unable to repay the loan, you could ruin the relationship with your friend or family member.Recommended: Where to Get a Personal Loan

Business Loans

Business loans are financial lending products that businesses can use for business purposes, such as buying machinery and equipment. Companies can explore small business loans to help expand their operations.Private lenders may invest in the debt and equity of small and medium-sized businesses as a form of financing. Private lenders may also offer commercial and industrial loans to businesses.Getting a small business loan from a private lender is ideal for those with less-than-stellar credit scores, as banks and credit unions may require high scores in order to qualify. The downside to this type of financing for businesses is that interest rates may be higher. However, if it’s your only option, it may be worth exploring further.Recommended: Guide to Business Loans for Bad Credit

Individual Money Lenders vs Companies

Consider the similarities and differences between individual money lenders and private lending companies:
Individual money lendersPrivate lending companies
Provide loans from their own personal wealthCan be firms that provide short-term loans to investors
Can be retail investors using peer-to-peer or P2P lending platformsCan be asset management firms investing pooled funds on behalf of clients
Can be venture capitalists providing funds to startupsCan be venture capital firms that invest in entrepreneurs
Can be angel investors providing entrepreneurs with capitalCan be fintech companies partnering with banks to offer personal loans online

What Are Private Lending Circles?

Private lending circles are personal ties and business connections linking private lenders with borrowers. You can consider borrowing money from three distinct private lending circles:

Primary Circle

Your primary circle includes friends and family members who may provide you with interest-free loans. Lenders in your primary circle may also give you funds without any expectation of repayment.

Secondary Circle

Your secondary circle includes acquaintances and colleagues who can provide you with funding. Lenders in your secondary circle could be folks you recognize from work, school, or social gatherings who are willing to provide you with a personal loan.

Third Party Circle

Your third-party circle includes investors and alternative financial service providers who may provide you with funding if you reach out to them. Lenders in your third-party circle could be nondepository financial institutions that earn profits by charging interest on loans.

Are Private Lenders Legal?

Yes, it is legal to use a private lender as a form of financing. Like federally-regulated lenders, private lenders must abide by state banking and usury laws. Private lenders are able to offer more flexible types of loans to a wide variety of borrowers, including those with poor credit.Recommended: Personal Loan Tips That Can Help You Get Approved

Tips on Finding Private Lenders

You can find private lenders online by searching for lenders who provide alternative financial services. Financial technology companies may offer personal loans through digital lending platforms, while other nondepository financial institutions may offer hard money loans for buying real estate.You can also find private lenders by visiting pawn shops, car title loan agencies, and alternative financial service providers who offer payday loans.

Private Lenders vs Conventional Lenders

Consider the similarities and differences between private lenders and conventional lenders:
Private lendersConventional lenders
Function as nonbank financial institutions or investorsFunction as chartered banks, credit unions, or thrift institutions
Primarily regulated at the state levelFace more stringent regulation at the federal and state level
Do not accept monetary deposits from customersAccept monetary deposits from customers
May offer unconventional hard money loansDo not offer unconventional hard money loans

How to Get a Loan from a Private Lender

To get a loan from a private lender, the first step is deciding if you want to use an individual lender or a company. If it’s an individual lender, such as a friend or family member, the first thing you’ll want to do is verbally express your interest and see what they say. If they’re interested in lending you money, you can discuss the terms and create a contract. For individual lenders, you can also look into peer-to-peer lending sites.If you plan on getting a personal loan from a private lending company, this is usually done through an online lender. Online private personal loan lenders typically have lower qualifications than traditional banks and credit unions, and funding times are often quick. The application process is usually straightforward, allowing you first to get preapproved within a matter of minutes. From there, you’ll submit the necessary documentation, receive your quotes, and decide whether or not to move forward with the loan.Recommended: Guide to Personal Loan Qualifications

Key Factors to Consider When Borrowing from Private Lenders

When borrowing from private lenders, it’s important to shop around to make sure you secure the best loan for your situation. Make sure to look at the interest rate, term, and repayment conditions before moving forward. Sometimes, interest rates through private lenders are significantly higher than they would be through other types of lenders, so make sure to look at all of your options before committing.It’s also important to consider the benefits and risks of using a private lender. Benefits may include less stringent requirements and faster funding times; whereas the main drawbacks of using a private lender are higher interest rates and fees.

Private Lenders and Loan Security

Certain types of private loans are backed by collateral, such as a private mortgage or property refinance. Private lender personal loans, on the other hand, are usually unsecured, meaning they are not backed by collateral.A private lender may, however, suggest you put up collateral in order to increase your chances of loan approval or secure a lower interest rate. Putting up collateral lowers the risk to the lender. Options for collateral include a savings or money market account, a vehicle, stocks, bonds, fine jewelry, or any other assets the lender finds acceptable. 

Compare Personal Loan Rates

Lantern by SoFi can help you find personal loan offers. Just provide basic information about yourself and the loan you need, and Lantern can guide you in the process to apply for a personal loan with the lender of your choice.Compare personal loan interest rates with Lantern.

Frequently Asked Questions

Can I borrow from multiple private lenders simultaneously?
What happens if I default on a loan from a private lender?
Can I refinance a loan through a private lender?
Can I negotiate loan terms with a private lender?
Are there any regulations or oversight for private lenders?
Photo credit: iStock/Jacob Ammentorp Lund

About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and served as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.
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