In this blog, we will cover lending private money loan as a private money investor. Borrowing and or lending money from financial institutions comes with protocols and guidelines that have, over time, evolved into a standard process. We all have to follow should we choose that route. There are also other types of lending that exist.
For example, borrowing or lending monies on a personal level to friends and family, which in turn makes you the bank. Guidelines for such lending are unique in almost every circumstance. Therefore developing guidelines are usually abstract thus, agreed conditions based on each individual case are more common in the personal and private money lending world.
Caution Against Lending Money As a Private Money Loan Investor
There are many reasons why not to lend to friends and family. The most common has to do with your own personal finances. Most people don’t have the liquidity or can afford to take a loss. Any time you loan money to a friend or a family member, you must always assume any money loaned has a strong possibility that money will be lost.
If you have to dip into a retirement account, emergency fund, or other necessary funds to make the loan, it’s not a loan you should be making. Other things to worry about are family strife, tax problems, and complacency. If your family or friends come to you for loans simply because you lend at a low (or no) rate, you are simply hurting your own finances to subsidize theirs. A loan from a bank or credit union (recommended) will help them build good credit but will also help raise their credit score in the process.
Gift Versus Lending Private Money Loan
Reasons against personal lending often evaporate in the face of emotions when one of your loved ones needs the money. In this case, you must clearly distinguish between a gift and a loan. A gift has no expectation of ever being repaid a loan. On the other hand, it is understood that it should be paid back in full.
This includes any interest if so agreed upon, and the terms and conditions should all be in writing to avoid misunderstanding. In most cases, giving money as a gift is usually a personal choice based on emotion. But making a loan has to be done in a logical manner and thought out.
Saying Yes Before Lending Private Money Loan
Ask yourself a few simple questions before you open up your deposit box. Would you loan this person your car? Do you trust their opinion? Would you consider taking their advice ?…. The answer to these questions is usually good indicators of your chances of being paid back in full. The next question should be, what is the money for? You have the right to know no matter how large or small a loan is.
In many cases, most people say they need money to pay off debts, so to be sure the money is used properly, paying off someone’s debt directly as opposed to a loan can be more comforting. The one thing you don’t want to do when it comes to personal lending is to keep pouring money into a sinking boat, as this can lead to all types of issues.
Collateral Required on a Private Money Loan
All this being said, it doesn’t mean you shouldn’t help. By simply asking the right questions and learning more about the person’s needs and the type of loan, perhaps you can find alternative methods of helping, such as COLLATERAL LENDING. This is done by holding something of value (from the borrower) as collateral, i.e., title to a vehicle.
This increases your chances of being paid back or, at the very least, if in the unfortunate circumstances of default. You have some recourse or means to recover most of your money, so it’s not a total loss.
Coming To Terms on Private Money Loan
Verbal contracts rarely end well. The chance of problems arising even with small and short-term loans always exists. For example, if the payment comes a few months late and you have to charge your groceries on your credit card, you are losing money on the loan.
It’s money you’ll recover because usually there are no written terms. Signing contracts usually deters or discourages most people from coming to you for a loan. Both parties should work together on the terms before signing.
Making A Written Agreement
Have an attorney in your local area draw up a written payment agreement/contract. The following are a few guidelines to follow when writing up a contract:
- Clear conditions need to be written in the event of unforeseen circumstance
MAKING IT OFFICIAL:
- It doesn’t hurt to run the contract thru a lawyer and then have it notarized
- Personal loans can be a nightmare if either party fails to approach it with caution
- If you still don’t feel like going thru all the precautionary steps and still wish to make the loan, there is an alternative.
- Third-party companies exist and act as intermediaries for personal lending for a fee.
- They can set up the contracts, structure automatic payment schedules, and monitor the process throughout
- If all goes well, this is a much better alternative than going thru with a poorly thought-out contract.
You’ll be able to close out the loan and have the peace of mind and comfort of knowing that you have helped out a loved one in need without harming yourself or anyone else.
How Can I Get Started With a Private Money Loan?
Gustan Cho Associates, Inc. are mortgage brokers licensed in 48 states with a network of 190 wholesale lenders on primary owner-occupant homes, second homes, investment properties, and commercial loans. We have hundreds of non-QM and alternative mortgage loan programs. The team at Gustan Cho Associates are experts in helping seasoned real estate investors.
The team at Gustan Cho Associates are a group of veteran mortgage professionals are ready to answer any questions home buyers or homeowners with mortgage inquiries. The team at Gustan Cho Associates is a group of real estate and mortgage industry experts which includes the following: real estate agents, residential mortgage loan officers, industry experts whose mission is to provide information about real estate, conforming loans, non-conforming loans, specialty financing programs. The mortgage industry is so complex with new regulations that are constantly changing. New rules and regulations is being implemented, that our goal is to express the opinions of industry experts and offer their opinions. Company NMLS 1660690 Branch NMLS 2315275
We are experts in real estate investments and traditional and non-traditional areas of mortgage lending. Gustan Cho Associates are experts in originating and funding FHA, VA, USDA, non-QM, and Conventional loans with no overlays and commercial mortgage lending. Gustan Cho Associates is looking forward to helping borrowers who could not qualify at other mortgage companies. The team at Gustan Cho Associates is available seven days a week, evenings, weekends, and holidays.
November 24, 2022 - 5 min read