General information only. This article is educational and is not financial, legal, tax or investment advice, or an offer to lend or invest. Get advice from qualified professionals about your situation.
"How much does it cost?" is the first question most borrowers ask a private lender, and it should be. The honest answer is that it depends on the deal. But you don't have to guess. This guide breaks down every part of what a private loan costs, explains what moves pricing up or down, and shows how to compare offers so you know the real number before you sign.
Rates vary widely across the private market, and a "typical rate" quoted out of context can mislead. Published figures are general market ranges at best, and nothing in this guide is a Diamond Ridge offer. What matters most is knowing how to read a quote.
Why private loans cost more than bank loans
Banks fund loans with low-cost deposits and only lend to borrowers who fit strict rules. Private lenders use their own or investors' capital, accept situations banks won't, and often move faster. That flexibility and extra risk are reflected in the price. A private loan is usually a short-term tool. You're paying for speed, certainty and a structure that works, not for the cheapest money available.
The parts of a private loan's cost
Interest rate
This is the headline number. Check three things:
- How it's calculated. Monthly compounding costs more than annual compounding at the same stated rate.
- How it's paid. Many private loans are interest-only, with monthly payments. Some add the interest to the loan balance instead, or take it out of the advance up front (a "prepaid interest" structure).
- Whether it's fixed. Most private loans are fixed for the term, but confirm what happens at renewal.
Lender fee
Most private lenders charge a fee for arranging and funding the loan. It's often a percentage of the loan amount. Ask whether it's deducted from the advance. If it is, you'll receive less than the face amount of the loan.
Broker fee
If a mortgage or commercial broker brought you to the lender, they may charge their own fee on top of the lender's. In Canada, brokers have to disclose this.
Legal costs
You'll usually pay for your own lawyer and the lender's lawyer. Commercial deals with multiple securities or corporate guarantees cost more to document.
Appraisal, valuation and due diligence
Real estate usually needs an independent appraisal. Equipment may need an inspection or valuation. Business loans may need financial review, searches, or an environmental report.
Prepayment terms
Can you repay early without penalty? Some private loans have a minimum interest period, such as three months of interest, even if you repay sooner. This matters a lot if you expect a quick exit.
Renewal and extension fees
If your sale or refinance takes longer than the term, you may need to renew. Find out the renewal fee and whether the rate changes.
Default and late charges
Read the default provisions. Fees for missed payments, default interest and enforcement costs can be significant.
What moves pricing up or down
Pricing is driven by risk. The main factors are:
- Loan-to-value. Less debt compared with the asset's value means lower risk.
- Type and quality of security. Real estate in a major centre is usually priced differently from specialized equipment or a business with few hard assets. Our secured loans and high-risk lending pages explain how we look at each.
- Position. A first mortgage is lower risk than a second mortgage. See our second mortgages page.
- Strength of the exit. A signed sale agreement or a refinance commitment reduces risk.
- Term and size. Very small or very short loans carry fixed costs that make them more expensive on a percentage basis.
- The borrower's track record. Experience with similar deals and clear communication help.
How to compare offers: use total dollar cost
The best way to compare private loan offers is to work out the total dollar cost over the term you realistically expect:
- Add up all interest payable over the expected term.
- Add the lender fee, the broker fee, and legal, appraisal and administration costs.
- Add any minimum interest or prepayment penalty that applies to your expected exit.
- Compare that total against the net amount you actually receive.
Two offers with different headline rates can come out very close once fees and prepayment terms are included. Sometimes the offer with the lower rate is actually the more expensive one.
Questions to ask every private lender
- What's the total cost if I repay in six months? In twelve?
- Are any fees deducted from the advance?
- Is there a minimum interest period?
- What happens if I need an extension?
- Who pays legal and appraisal costs, and roughly how much should I expect?
Always have your own lawyer review the commitment before you sign.
How Diamond Ridge prices deals
Diamond Ridge reviews financing requests from $2,000 to $12,000,000 across Alberta, British Columbia and Canada. We finance real estate, bridges, equipment, oilfield assets and business transactions. We price each deal on its security, its exit and its structure, and we lay out the costs in writing so you can compare. Because we're a group of entrepreneurs from many industries, we can often structure a deal in a way that improves the economics for both sides. Read more about how it works, see our lending options, or compare a private lender vs a bank.
Get a quote on your deal
The only way to know what your loan will cost is to have a lender review it. Submit your deal with the amount, the security and your exit plan, and our team will reply by email with next steps.