Loans from private lenders in Canada are usually quite different from bank financing. The interest rates are usually higher, there are more fees and the terms are often shorter. For this reason, it’s important to do your due diligence before taking a loan. Below are four questions you can ask a private lender.
How long do I have to repay the loan?
It’s important to have a strategy in mind to repay your debt. Doing so requires planning, so you’ll need to know how long the term of the loan is.
Can the loan be prepaid without penalty?
Lenders make more money the longer you borrow from them, since interest is usually payable monthly. As well, there can be expenses associated with paying off the loan, such as discharging a mortgage (usually done by lawyers and paralegals). For these reasons, it is quite common to face penalties if you want to pay off the debt ahead of when was originally scheduled. This practice is used by both banks and private lenders.
How soon will I receive funds?
It can take several weeks to set up a private mortgage loan, especially if there are delays in securing property appraisals, etc. Unsecured loans, on the other hand, can be much faster because there is less paperwork involved. Regardless, it’s important to gain a clear understanding from the private lender about when you can expect to receive funds.
What is the total cost of borrowing?
When people think about the expense of borrowing money, they usually associate it with an interest rate. However, there are actually three types of expenses associated with borrowing from a private lender.
- Interest
- Fees
- Reimbursements of the lender’s expenses (such as legal fees)
For instance, a $20,000 loan might come with a 16% interest rate, a 5% setup fee and $2,000 of reimbursements of the private lender’s legal fees.
Conclusion
Private loans can be a useful financing solution for Canadians, but they can also be expensive. Some lenders bury terms and conditions in fine-print, making the loan contracts difficult to understand. As such, you should never rush into taking a loan. Be sure to shop around for not only the best rates, but also for the terms that are most suitable to your needs. Take the time to first speak with a lawyer or a financial advisor to ensure you understand the documents you’re about to sign.