When you lend money, it comes back in two ways: payments during the loan, and a payoff when it ends. Before you lend, you should know exactly how and when both happen.
People worry less about the interest and more about this: "Can I get my money back?" Here's how it works.
1. Payments during the loan
Most private loans pay something along the way, often monthly or quarterly. Your loan documents spell out how much, how often, and whether payments are interest only or include some principal.
2. The payoff at the end
Every loan has a term. When it ends, the borrower owes the rest. On many private loans, that's a single larger payment at the end, called a balloon. Know the date, and know how the borrower plans to make that payment.
3. Early payoffs
Sometimes your money comes back sooner. In note lending, that often happens when the homeowner sells the home or refinances, and the note gets paid off. Ask what happens then. Do you get your money back right away? Can you roll it into a new loan if you want to keep it working?
Free lender guide: 5 questions to ask before you lend to anyone, plus a 12-item document checklist.
4. If you need out early
This is the one most people forget to ask about. Private loans aren't like a savings account. You can't usually pull money out whenever you want. Some note investors can replace you with a new lender, or pay you off early by agreement. Some can't. Get the answer in writing before you lend.
Match the loan to your timeline
- Only lend money you won't need for the full term.
- Keep an emergency fund somewhere else.
- If it's IRA money, plan for required withdrawals. Here's how RMDs work when your IRA is lending.
Questions to ask before you lend
- How often will I get paid, and how much?
- When does the loan end, and how will it be paid off?
- What happens if the note pays off early?
- What happens if I need my money back before the end?
- Who tracks my payments, and how do I see them?
See how lending with LJH works, or read what secures a loan like this.
Common questions
What is a balloon payment?
A larger, final payment due when the loan ends. Many private loans have smaller payments along the way and a balloon at the end.
Can I get my money back early from a private loan?
Only if your loan documents allow it, or the borrower agrees. Ask before you lend, and get the answer in writing.
What happens if a note pays off early?
The note investor gets the payoff money. What happens to your loan then depends on your documents. You may be paid back, or have the option to roll into a new note.
Written by Larry Hoffman
Managing Member of LJH Investments, LLC in Madison, Indiana. In real estate since 2006, with 300+ mortgage notes bought. Author of Mailbox Money Retirement.
General education, not legal, tax, or investment advice. Talk with your own attorney and tax adviser about your situation. All investing has risk, including loss of principal.