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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 March 10, 2022
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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.

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.

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.

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.

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.

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

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 anyone be a private lender?
Is a private lender a bank?
Do private lenders check credit?
Are private lenders legal?
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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