working with private money loans
I got a question that asks if you have a private money loan, a 15 year note for example and then pay it off early (in year 5), is there a penalty?
Yes and maybe. [This is a quick answer that I will fill out more on in the next couple days, so be sure to come back and ask lots of questions about it].
Yes because the lender had planned to make care free income for 15 years, and now you are making them work by having to get that money back into play again (thus it’s your job to send them another investment opportunity along with the check, and to give them a heads up). If there was no “official” prepayment penalty, consider giving them a gift for having to go through the effort of re-lending you the funds for your next investment.
Maybe because it depends on the terms of the loan that you set-up before hand. It may or may not have prepayment penalties. When you do a private loan, you make a promissory note and it should outline the details (rules) of the loan. Because it is private there is a lot of lead way. Also there are a lot of restrictions (regulations) on lending and borrowing private money, but that’s a different subject.
By default, there is no prepayment penalty for private money loans.
When I borrow private loans, I don’t have the lender put in a prepayment penalty. One reason being that they may ask me to get the money out early or that I may want to pay the loan off early. So what I do to be fair is to give at least 3 months of interest even if I somehow flip or refi the house right away. Lenders deserve to make money on their effort and have a plan when they lend it so it’s good to respect that. Then your job is to get it back into play right away. I also send my lenders cards (thank you notes) and small gifts to let them know I appreciate it and to show respect.
In the end, if there is no prepayment penalty written into the loan, then you do not HAVE to pay anything more and everyone did their job once you paid what you promised too.