How to Approach a Private Lending Situation

Positive ways to approach the lending relationship.

1. Is the loan good for the lender as well as the borrower?

2. Write it down in a loan agreement.

To avoid misunderstandings about amounts, payments, times, interest rates, and other terms and conditions – write it down, preferably in the form of a promissory note.
Other parties such as your accountant, the IRS and other family members will benefit greatly if you write it down.

3. Introduce a neutral third party.

A third party can remove the emotions from this important financial transaction and help you complete a loan form.
In addition, the third party can add a degree of professionalism to help insure that the relationship is preserved.

What Interest Rate should we choose?

Interest Rates can vary widely but both the borrower and the lender must feel that the rate is “ fair,” and it must be stated in your loan contract.
Both parties should recognize that the lender could place the money in a savings account and receive interest. This rate helps set the potential rate for the loan.
Both parties should recognize that the borrower could get the money from a bank or a credit card or some other source. The rates from these sources also contribute to setting the rate for your loan.
Both parties should agree that there are other sources of rate information such as BankRate.Com - Current Rates and IRS - Index of Interest Rates.

What payment term should we choose?

Generally the term should produce a payment that the borrower is comfortable making and should be stated in the promissory note repayment schedule.
Additionally, the term should be within the timeframe that the lender does not need the money for other purposes.

Is it OK to ask for a Promissory Note?

The most important reason for asking for a promissory note is to preserve the relationship – not to test it. If you are uncomfortable asking for a note to be signed – imagine how uncomfortable you will be if you need to discuss a sensitive matter about the loan in the future, say a missed payment or a misunderstanding about the rate.
It is not wrong to ask for loan documentation between family and friends. In many ways it not only benefits the borrower and lender but also other family members who many have incorrect assumptions about the loan.
Disagreements are much less likely when the loan is in writing.

If I make this loan, what about the other family members?

It is not incorrect to think about the "Bank of Dad and Mom". If you write it down in a loan form, it is more likely that each family member will feel as if they were treated fairly.

What should I tell the borrower about why we are using One2One Lending?

They will help us set up the loan and make sure we have done it properly.
They can be the third party that helps us with the loan so it takes the pressure off of talking about sensitive matters.

Lending Money - Get it in Writing