With the credit crunch in the United States, banks in Canada have tightened their lending criteria. As a result, they will not approve as many people for loans as they might have a year ago. So what is a borderline purchaser or borrower to do? Besides "B lenders" or "sub-prime lenders", the other option for financing that arises is private lending. Private lenders are usually small companies or individuals with available funds looking to lend to others at a premium.

Before you rush out of your bank because the teller made you wait 20 minutes to get your account balance, be aware that private lenders cannot usually match the rates offered by the banks and will not compete with the bank for borrowers. Instead, they prefer taking transactions that the banks rejects as the borrowers usually have little option and will have to pay a much higher premium for the loan. The rates that some borrowers end up paying can sometimes even exceed what a credit card loan would cost.

The other issue with private lending are the lenders themselves. For a bank, a $100,000 loan may not be a very high priority, but for a private lender, it could represent 100% of his or her investments. Therefore, if a borrower misses a payment, even by a day, he or she should be ready for some very steep administrative, legal and/or collection fees. They usually will not give you time to pay, whereas a bank might be more willing to assist in your situation.

Unlike mortgages from banks or financial institutions, private lenders will be represented by a lawyer of their choice and borrowers will need to retain their own counsel. This can often double or even triple the legal costs involved in your transaction. In about 95% of private mortgage transactions, the borrower must foot the bill of the lender's lawyer. Unless the loan is below a particular threshold, the lender and borrower will need their own lawyers.

Private lenders, unlike banks, often do not want to commit funds for a long period of time. Many banks will give great rates with a five year mortgage term, but most private lenders will limit a mortgage to only one or two years so that they can increase the interest rate shortly or charge renewal fees.

If your mortgage broker puts a commitment in front of you from a private lender, it may be wise to stop for a minute and think about whether you can afford your property. Even if you can afford it during the term of your mortgage, you may want to consider your overall long term financial situation and exit strategy once the mortgage term is up. Keeping the mortgage up to date and paying the higher costs may be for nothing if you cannot refinance the property at the end of the term and are forced to sell.

        

 

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