Private lending rate question - is it APR or term?

Question

This sounds like a dumb question but in private lending, generally, is the % rate annual or for the length of the short term loan? I'm pretty sure it's annual unless otherwise discussed and I know that private lending deals are whatever you negotiate but thought I'd check at this early stage to make sure I'm on the same page as more seasoned private lenders. Thanks

Chris Mason · Answer

Rate * Balance / 12 is the interest due in any given month.

If it's an i/o loan, the result of the above will also be the monthly payment. If it's an amortizing loan, the result of that calculation will be the chunk of the P&I payment going towards interest, with the rest going towards paying down the balance, assuming taxes and insurance is not impounded.

Jill Thomas · Answer

Thanks for the heads up. It's really hard getting a good look at multiple lenders to start with, making sure to ask the right questions. Definitely learning as I go and finding out new things I should ask with each person I talk to. I knew about the points but hadn't heard so far about origination fees. Thanks!

Yonah Weiss · Answer

Usually the % is annualized. However to get the REAL APR you should factor in the origination points and fees. That will give you a better picture of what % you're actually paying on the amount borrowed.

I once got a quote from a lender on a small fix and flip. The rate seemed great- 8%...but the had a 1% origination fee, or $3,000 (whichever was the lesser amount) For the $3,000 fee to actually equal 1%, the loan would have to be for $300,000. Unfortunately this was a small and fast deal. $45,000 loan with a six month term. So the fee actually turned out to be an additional 13.33%.

My point is, what looked like at first to be 8% + 1% loan turned out to be 29.33% APR!!! Make sure to do the math folks!