Private lending can be an excellent form of passive income or a new career path. That said, there is a process to selecting profitable investments. Just as well, you’ll be loaning large sums of money. So it’s wise to understand what becoming a private lender entails.
What Is Private Lending?
Before discussing how to become a private money lender, it’s wise to have a clear understanding of what private lending entails. Essentially, private lending is the process by which an individual or small business loans a significant sum of money to a borrower.
This type of lending differs from bank loans, as private lenders typically have no affiliations with major financial institutions. Therefore, private lenders can technically invest their money in any way they see fit. However, most lenders tend to work in property or real estate investment.
This is because there are usually more significant profits involved with these ventures. So, if this sounds appealing to you, pursuing a career in private lending is worth considering.
Who Can Be One?
Anyone interested in becoming a private lender can do so. However, small businesses and individuals with a hefty cash flow are the most common participants.
These groups usually have enough extra revenue to loan privately without detrimental risk to their financial health. So, before you start lending, ensure that you fit—at least loosely—into one of the following categories.
- You might have a surplus of cash sitting in savings.
- You may have sizeable retirement savings like an IRA or 401K.
- You are looking for passive income.
- You want to participate in the real estate market outside of agency or brokerage.
Indeed, anyone interested can become a private lender. That said, it’s much easier to find success if your funds are already secured and ready to use. So, ensure that you have a steady source of funds before you start actively loaning it out.
How Do I Get Started?
By now, you should know the basics of what private lending is and who typically participates in it. So, let’s take a moment to figure out the basics of how to become a private money lender. The first step is to have your finances in order and ready to invest.
But after that, you’ll need to take some time to research different investment opportunities. Be mindful that the opportunities you pursue are viable. And always do your due diligence when choosing whether or not to loan your money to a potential borrower.
Lastly, once you’ve selected your investment and subsequent borrower, it’s time to draw up the terms of your loan. Ensure that you put these terms into a legally binding contract. And if you don’t have contract writing skills, hire someone who does. After that, you can start collecting your loan according to your terms.
