When you go to the bank for a loan, you might think that it would be easier as a millionaire. However, when it comes to lending to high net worth individuals, more money can mean more problems if the individual does not have a traditional income or liquid assets. Here are details about lending to high net worth individuals and the best strategies to get a loan.
A financial advisor can offer wealth management and tax planning, among other services, to wealthy clients.
How high net worth loans work
Lending to high net worth individuals typically works differently than traditional lending because borrowers and lenders have different needs and expectations.
When high net worth individuals (HNWIs) seek a loan, they typically work with a private banker or wealth manager who specializes in lending to high net worth individuals. The private banker assesses the borrower’s financial situation, including their net worth, income and creditworthiness, and works with them to determine their loan needs.
The private banker then works with the lending institution to structure a loan that meets the borrower’s needs and whose terms are tailored to their specific situation. For example, the private banker negotiates a lower interest rate, a longer repayment period or other favorable conditions on behalf of the borrower.
HNWIs can secure their loans with collateral such as real estate, art collections or other high-value assets. Collateral provides the lender with a certain level of security in the event that the borrower defaults on the loan.
Throughout the lending process, the private banker provides the borrower with a high level of personal service, including ongoing support and advice on financial planning and wealth management. Therefore, lending to high net worth individuals is typically a long-term relationship between borrower and lender and not a one-time transaction.
What is high net worth lending?
High net worth loans, also known as private banking or wealth management loans, are tailored and specialized lending services for HNWIs, typically defined as individuals with a net worth of $1 million or more.
Lending to high net worth individuals can take many forms, including secured and unsecured loans, lines of credit, mortgages and structured financing solutions. These loans typically meet the specific needs of the individual borrower and can finance a wide range of assets.
The conditions of loans for wealthy individuals are generally more flexible than those of conventional loans. High net worth loans feature lower interest rates, longer repayment terms, and more personalized service.
These features are helpful because HNWIs often have complex financial situations that require tailored solutions. Additionally, HNWIs are willing to pay higher fees for personalized service and access to specialized financial expertise.
In addition to credit services, HNWIs can access a range of other services from their private banking or wealth management providers, including investment management, estate planning, tax planning and insurance solutions. These services help HNWIs preserve and grow their wealth over the long term.
Why wealthy individuals are rejected when it comes to lending
If you are an HNWI seeking a loan for a business or investment opportunity, you may face resistance from lenders for a variety of reasons:
Income instability
While proving a stable income reassures lenders, the opposite makes them hesitant about lending. Borrowers who cannot demonstrate healthy cash flow may need to provide lenders with additional documentation to demonstrate their ability to repay loans on time.
Suitability as a borrower is particularly important because larger loan amounts mean a higher risk for the lender. As a result, HNWIs are often required to provide more proof of income to meet lenders’ requirements compared to regular paycheck earners.
Additionally, lenders have stricter loan application processes for accredited investors to minimize the risk of loan defaults. For example, traditional loans often require documentation such as proof of employment, pay stubs and regular income streams. Without these documents, it may be more difficult for HNWIs to obtain a loan.
Lending regulations
After the 2008 financial crisis, lending regulations became stricter to prevent high loan defaults. These regulations establish underwriting standards that evaluate a borrower’s ability to repay a loan, property value, equity ownership, and overall creditworthiness.
Strict lending regulations may not benefit HNWIs with unusual employment arrangements and unstable income. Therefore, they typically lack important loan application documents such as W-2s or pay stubs, making it difficult to comply with lenders’ standards.
Credit strategies for wealthy individuals
For HNWIs seeking financing, several strategies can increase their chances of approval.
If you’re ready to be matched with local advisors who can help you achieve your financial goals, get started now.
Use your assets
Firstly, you can secure a loan based on your financial strength. Borrowers can demonstrate that they have sufficient assets to qualify for a non-conventional loan. Generally, lenders count liquid assets as valid income for loan repayment. They may also conduct their own valuation of your assets to ensure they are valuable enough to support your loan payments.
Submit a financial report
You can also support your loan application with a personal financial report. This document is a summary of your net worth that is intended to demonstrate your financial ability to qualify for the loan. Additionally, a financial statement is particularly helpful if you lack a W-2 or pay stubs from a traditional employer.
Mortgage without proof of income
Another credit access strategy for HNWIs is a mortgage without proof of income. Although this type of loan requires less documentation, a larger down payment may be required and loan interest rates are typically higher than traditional mortgages. For example, your mortgage may require a down payment of 25% and an interest rate of 10% without proof of income.
Personalized loans
Lenders typically offer tailored loan options for HNWIs. With a solid credit history, you can qualify for one of these individual loans. The lender will then adjust the payment plan to suit your situation.
Bottom line
HNWIs with diverse investment portfolios and fluctuating incomes face a different reality when it comes to lending than typical borrowers seeking loans. Larger loan amounts mean more risk for lenders, which is why they apply stricter standards for loans to high-net-worth individuals. Therefore, impressive portfolios do not necessarily pave the way to assets when you apply for these loans to expand your business or investments.
Additionally, available solutions tailored to HNWIs often require extensive documentation and proof of sufficient cash flow and asset ownership. Therefore, proving your total assets is crucial to increase your chances of admission.
Private banking agents will work with you to find tailored loan solutions that fit your situation. However, it also helps to meet several basic credit requirements, including a high credit score and reliable documentation to prove your net worth.
High- Tips for lending money to wealthy people
-
When it comes to lending to high net worth individuals, you need to find a bank or alternative lender that meets your needs. A financial advisor can point you in the right direction if you’re not sure where to turn. If you don’t already have a financial advisor, finding one is just a few clicks away. SmartAsset’s free tool connects you with up to three vetted financial advisors working in your region, and you can survey your matching advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
-
By taking out loans you can expand your financial options. However, valuable assets must be protected. That’s why here’s a guide to high net worth insurance to help you get what you need.
Photo credit: ©iStock.com/Delmaine Donson, ©iStock.com/AmnajKhetsamtip, ©iStock.com/SDI Productions
The article How does the granting of asset-based loans work? first appeared on SmartAsset Blog.