Most lending that occurs in the U.S. is facilitated by commercial banks, credit unions, and private lenders. Banks and credit unions are pretty familiar to most of us. Private lending, not so much. Unfortunately, there are borrowers who use private lending as an excuse to practice poor financial management.

Private lending comes in many forms. It can be:

• a loan from a finance company to cover a big-ticket purchase
• a home mortgage arranged through a broker
• a business loan arranged to help restructure debt
• a hard money loan utilized to complete a real estate transaction.

Many private loans are structured just like traditional loans from banks and credit unions. Other private loans – particularly hard money and bridge loans for real estate – are structured differently.

Private Loans Can Be Easier to Get

A key aspect of private money is that loans can be easier to get in some circumstances. Take a hard money loan for a real estate transaction. According to Actium Partners, a hard money lender based in Salt Lake City, UT, a loan of this nature is almost always based on the value of the property being acquired.

A hard money lender will not look at the borrower’s credit history and score. It will not dig into annual income, profit and loss, etc. The lender will base its decision almost completely on the value of the property. In theory, this means that borrowers with poor credit scores and histories can still get funding.

A similar scenario might exist in the consumer realm. Consider a consumer looking to outfit his entire house with new furniture. He wants to take advantage of in-store financing. That financing is actually provided by a third-party private lender willing to approve the purchase after just a cursory glance at the consumer’s credit score. The financing company doesn’t do a deep dive into the consumer’s credit history.

High-Risk Loans for High-Risk Borrowers

Hard money loans for real estate transactions tend to be moderate to low-risk loans. Yet there are some types of private lending that carry a much higher risk. Lenders offer high-risk loans to high-risk borrowers. Among them are payday loans.

These high-risk loans clearly illustrate the fact that private lending is not an excuse to continue poor financial management practices. If a person’s finances are such that depending on payday loans is considered a good option, it is likely the individual in question is a poor financial manager. Obtaining payday loans doesn’t change that.

The same would be true of a real estate investor who utilizes hard money only because his poor financial management disqualifies him from traditional funding. Hard money may enable him to keep doing business as usual, but for how long? Poor financial management will continue to haunt him. It could eventually spell his doom if he does not correct his financial practices.

Sound Financial Management Is Always Wise

Regardless of why a borrower might seek out private lending, it goes without saying that sound financial management is wise. Following established financial management principles protects consumers, business owners, and investors regardless of how they choose to borrow. In turn, it also protects the lenders with whom they do business. All benefit as a result.

Private lending is out there to be had. It can be the best option in so many cases. However, private lending should never be used as an excuse to continue poor financial management practices. If you are forced to turn to private money because your finances are a wreck, make a commitment to getting your finances back on track.