Private Lending

Lending money to someone you know is different to earning interest on a bank deposit or investing in the stock market. As a lender you mainly need to consider the risk involved and how this will affect your relationship.

Think of the Issues

If you thoroughly consider the issues you will make a better decision about making a private loan and feel more comfortable about the loan arrangement.

Is this a good deal?

What is the opportunity cost? How does the private loan compare with other things you could do with your money? If you are lending to someone at 0% interest it is costing you the interest you could have earned from an alternative investment.

How much can you afford to lend?

Is the amount of money involved a significant proportion of your savings? How badly would you be affected if the loan went bad?

What do you want to achieve from the loan?

Are you making the loan for an investment or just to help out a friend? Be clear on your objectives.

Is it really a loan or a gift?

Be clear with the borrower whether it is a gift or a loan and if you expect to get your money back.

If it is a loan you should document it using the Fosik Private Loan Kit. If there is flexibility in your agreement you can still be easy on the borrower if difficulties arise, such as forgiving a payment.

How to protect your interests

By following the guidelines in the Fosik Private Loan Kit you will be taking the first and most important step for protecting your interests.

From Fosik’s experience there are 4 important things you can do.

Document the loan. Document the loan with a promissory note, which is a legally binding document and enforceable in court.

Installments. Default rates drop significantly if the borrower pays the loan off in installments rather than a lump sum at the end of the loan period.

EFT. Internet banking is easy and available to most people. Best of all there is a record of payments made and it eliminates mistakes. Automatic transfers eliminate many missed payments.

Use a third party to manage the loan. A neutral and independent third party keeps the loan business like and out of the arena of the personal relationship. A third party will not put off making taking some action and can also mediate as necessary if problems arise.