Stumbling Blocks in Private Loans - Tips and Tricks

Person who wrote the post admin Feb 05, 2021
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Private loans are widespread, especially among friends and family. They are a simple and often cost-efficient alternative to bank loans. But they also offer many stumbling blocks. As a credit specialist, we have compiled the most important points and offer a template for a loan agreement for download.

What should be considered with a private loan?

We recommend that you record the most important key points of the loan in writing. It is very important that the financial components are defined as clearly as possible. This is particularly important if the parties have different views of the loan content, which is usually only revealed during repayment if there is no written form. In addition, any legal enforcement is difficult in the absence of a corresponding contract.

Minimum requirements for privately granted loans
•    Written form of a loan agreement is strongly recommended (templates for a loan agreement can be found further down this blog)
•    Clear definition of the credit conditions (interest rate, amount, term), the relevant knowledge is often missing here to correctly set up and apply the conditions
•    Define clear payment terms (interest payments, repayment)
•    Often there is also a regulation on what happens in the event of default

Privately-awarded credit, when applied correctly, offer many benefits. However, there are also some stumbling blocks that must be weighted accordingly. In the individual case, it must be assessed whether a private loan makes sense or whether another loan (e.g. via Crowdlending) is a better fit.

Advantages of privately issued loans
•    Flexibility of contract enables an individual regulation of the loan
•    Mostly simple availability
•    High flexibility regarding the financial structure (e.g. repayment modalities)
•    Usually, low interest rates
•    Is not subject to the KKG (Consumer Credit Act)

Obstacles / stumbling blocks
•    High potential for conflict in the event of problems with interest and / or capital repayment
•    No credit insurance possible to protect the capital (e.g. death, unemployment, incapacity, etc.)
•    No in-depth credit check - everything is based on trust instead of facts, which makes the risk difficult to assess
•    Little or no information about the debtor's financial situation (he/she already has debts and this additional credit even leads to over-indebtedness)
•    In the event of default, there is hardly any legal enforcement in order not to burden the relationship between lender and borrower
•    High administrative effort (regular control of incoming payments, higher effort in the tax return (manual calculation of interest and outstanding capital)

Template for a private loan agreement
Find a template for a private loan contract here.

Download template


What safe alternatives are there to classic personal loans?

 

Processing via a third party provider such as Crowd4Cash

Advantages:
•    Involvement of an external independent organization creates trust and commitment
•    Fair interest through the direct connection from private to private
•    Direct connection to friends or family possible, but not mandatory
•    Credit check by Crowd4Cash as an additional security element
•    Clear payment terms
•    Dashboard for private borrowers and lenders
•    No administrative effort for lenders - debt collection and preparation of a tax ID by Crowd4Cash
•    Payment default insurance is available (offers security for debtors and lenders)

Crowdlending how it works

Disadvantage:
•    Costs for the service provided by Crowd4Cash (approx. 1.1% per year of which 0.7% falls on the borrower and approx. 0.4% on the lender).

The classic personal loan from the traditional bank

Advantages:
•    Clear regulation by the bank (core business of the bank with appropriate experience)
•    Payment default insurance possible

Disadvantage:

•    Usually higher interest rates than private loans or Crowdlending loans
•    Not always available because, for example, the credit rating is insufficient
•    No connection to the lender (therefore no private loan)
•    Hardly any goodwill in the event of delay with high additional costs

Do you intend to grant a private loan or would you like to take out a loan? Feel free to contact us. We would be happy to show you the options for processing or borrowing via Crowd4Cash.