How to Give Someone a Loan

Now I am so glad, I am thrilled that some of you that are considering giving someone a loan are watching this video because it shows me that you're trying to be careful to some degree. You're thinking, okay, I'm going to give someone a loan, what should I worry about? Well, I've got seven things and it could be more. But I've crafted a seven point checklist of things to consider before you give someone your hard earned money in the form of a loan. Number one, get the entire loan documented in writing. And a caveat to this is making sure you don't give them money until they sign the document that you're preparing and writing. This is so important. You can't imagine as a lawyer and a law firm over the years how many people we've come to us that are trying to collect on a loan that's documented, maybe with an email, a napkin at Denny's, a handshake, and there's the statute of frauds and all these other little rules that go with it. But if you're trying to enforce collecting the money of giving someone a loan, you've got to get it in writing. Please do so and make sure that they sign it before you give them the money. Number two, get that interest rate out there in writing and make sure it's agreed upon. And this means a lot. You could hear the term out there, two points and 10% interest. Well, what does that mean? Two points usually means that I'm going to give someone a loan for $10,000 and I want two points back, either at the front or the back, or one on the front, one on the back. And a point on $10,000 is $100, that's 1% of $10,000. So if I get two points, that means kind of like the loan fee just to get the loan is $200. When are you going to receive that? Right up front, later on, like I said, anywhere in between. That's two points. And then it's the 10% per annum, meaning divided over 12 months. So if someone takes a loan from you for a six month period, is it really 5% over the period, but because it wasn't a full 12 months. So make sure the interest rate is completely clear as to when it's calculated. Is it monthly or annually? And how do you come to that interest amount? Number three, the term. What is the term of the loan? Is the loan for one year, five years, 10 years? And when do they make those payments? To me, that's part of the term. The terms could mean a lot. Right? But on this point, I'm talking about when do they make their payments? Is it due monthly, annually? Every six months, quarterly? And when is the loan due in full? Someone may make interest payments and then they may make a balloon payment on the back end, or they might make principal payments along the way and interest payments monthly. Again, a loan can be calculated or created in so many different ways, but no one remembers what those terms are if they're not put in writing. Go back to number one. Number four, what are the penalties for someone not making their payment on time? Is it after five days or 10 days or 30 days after the payment was due? Is there interest? On top of those penalties are the penalties added to the principal amount? See, all this is captured these first four points in the promissory note and this promissory note is what's going to capture all of these terms and then put in writing is going to be signed by the parties. Now, they don't have to be notarized. It might be nice, but you want to have that promissory note with these first four points clearly defining what these terms are. Number five, let's get a little more creative. And a term that might be in that promissory note are prepayment penalties. If someone prepaid the note, you might want a penalty because you wanted a guaranteed rate of return over time. Some lenders will put a prepayment reward in there because you're like, hey, if you pay this off early, I love it. I'll discount it by a certain amount so you can have all these little prepayment bells and whistles in the promissory note as well. Number six. And I saved one of the last two points, the best for last security. This is so, so important. What is the collateral behind this note? Are you going to have a lien against real property like a mortgage? Are you going to have a lien against a car and hold the title? Are you going to have a personal guarantee from the person that you lent the money to? For example, a personal guarantee means that if they don't pay, you can sue them personally in court and go after them. Unless they claim bankruptcy, you're going to have a good chance of getting that money. Well, you may say that's not good enough. I want to lean against their property. And is it a first or second or third position loan? Are you going to be behind others as lien holders against a piece of property? That's scary. You got to do your due diligence. Oh, I just gave You a hint to number seven and the final point. But here's the point. You want to make sure that that security is free and clear, or at least you know what security you're getting and what position you are in front or behind of other people. And I can't say enough that collateral does make sense. And a personal guarantee, which means you're going to be asking, who's this note given to? Are you lending a company or a person? Some people would say, oh, I want you to loan my company, but there's no personal guarantee. Doesn't have as much teeth as a loan to some individual. So think about that number seven and finally do your background on this person or company that you're loaning money to. Do your due diligence on the collateral that you're going to be getting to protect you if they default on the loan. Ask yourself this important question. How bad would it hurt if you lost the money on this loan? If this is your last dime and you're just lending it out to someone, maybe that's not a good idea for this loan. You might want to use a more safe investment to build your net worth and then use lending as another strategy in your portfolio. Be careful loaning your life's savings to someone. It can be dangerous. Now, first trust deeds, a term you'll hear out there are loans to someone with a first trust deed lien against property. And those are very secure. And you're not going to get as big an interest rate because they're secure. But you always want to ask yourself, who's this person? What's this property worth and could I afford to lose this loan and how bad would the damage be? And you've got to ask those hard questions. In summary, is lending bad? No. Is borrowing bad? No. But you want to make sure that it's in writing with all these terms I talked about. And you ask yourself about the worst case scenario and the best case scenario. So get it put together properly and get it reviewed by an attorney. Even if you just pay him for a half hour or an hour at most to just kind of look at the terms and make sure you're not missing anything. You're going to loan someone thousands and thousands of dollars. A little bit in preventative maintenance for a few hundred dollars with an attorney may be a very wise move in the process. Good luck. Thanks so much for watching that video. And I want to be your source for tax and legal strategies. It's hard enough to live the American dream without being out on the web on Google trying to find answers to complex questions and just clicking a mouse, hoping you got it right. My team and I want to be a huge resource to you, the law firm, accounting firm, my education resources on my site. Please continue to follow these strategies. I know they'll save you thousands. Now click here if you want to be a part of my newsletter. It's awesome. 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