Formalizing Private Loans to Family or Friends

August 12, 2007

By MoneyRates Team | Money Rates Columnist

Loans between families and friends have increased over the year as the American consumer has become more reliant on alternative methods of financing mortgage debt, credit card debt, and small business loans. Private lenders are advised to use a service like circlending.com to formalize their loans even if the loan is to a close family member or friend. For a small cost(as low as $99), a formalized legal payment arrangement can avoid possible long-term misunderstandings between close parties. In the event that a personal loan is used to purchase or refinance real estate a lender needs to be protected with a first or second mortgage on the property. A formalized mortgage also allows the the borrowers to receive a mortgage deduction for interest paid.

Services provided by Circlelending.com:

Loan documentation, including standard promissory notes, security agreements, mortgages and deeds of trust, as well as payment schedules, electronic signatures and onsite document storage.

Loan servicing, including flexible repayment schedules, payment processing via electronic funds transfer, year-end reporting, credit reporting, help with restructuring, online accounts, toll free customer service and restructures tailored to loans between relatives and friends.

Recording services for mortgages, deeds and UCC filings.

Mortgage services, including title searches, owner reports, escrow and tax payment administration, seller financing services, and full closings.

Free educational materials, including resources/tools, financial guides, online calculators, data on private loan interest rates across categories, and information on state maximums for private loan interest rates.

Rates can be set by the lender, but a good benchmark is the AFR rates published by the IRS and used to reset financing rates to markert conditions. Just like loans indexed to the Prime Rates, in most cases the loan rates is the nominal AFR rate plus a preminum. So a loan which is indexed as AFR + 3% and compounded monthly would charge a rate of 7.89% for August 2007.

Current AFR rates:

SHORT TERM (3 Years or Less)

August 2007 4.89%
July 2007 4.86%
June 2007 4.73%

MID TERM (Between 3 Years and 9 Years)

August 2007 4.98%
July 2007 4.84%
June 2007 4.55%

LONG TERM (9 Years or More)

August 2007 5.18%
July 2007 5.04%
June 2007 4.80%

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