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.




1 Comment

  1. Question will your debt improve by hanivg one bill to pay instead of several??? You are better off calling the credit card companies to ask their help in reducing your interest rates and making a conscious effort to pay the debt you have rather than focusing on consolidation. Please don’t consider one of those debt settlement places. They ruin your credit so badly that you may as well go bankrupt and owe nothing. What’s the difference between 7 years and 10 years of horrible credit that affect your interest rates, housing options, insurance rating and mainly your reputation??? You should consider a plan to pay what you owe and do it wisely. As you pay bills, take the same amount and apply to the next bill, then to the next bill, etc. Having one bill won’t get you any further ahead than hanivg several you owe what you owe. Get to the library and check out Dave Ramsey’s books on how to make a sensible plan. Reduce current expenses and increase income any way you can to get out of debt. You didn’t get into debt overnight so there’s no overnight solution except common sense and a diligent attempt to do what’s right. You CAN do it but not by hanivg everything you want. Start a savings account for long term needs and shop by value instead of cost. Look at both simple and complex debts. Consider downsizing home, car, wardrobe needs, etc. There were no credit cards 30 years ago and yet people had more. You can live without cable, cell phone, dinners at McDonalds, etc. Don’t try to keep up with the Joneses they’re broke!!! Worry about needs before wants and you’ll be amazed that you don’t need a loan you need a plan.

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