Because in recent years it has become increasingly difficult to take out a loan such as a mortgage or a business loan, more and more people opt for a private loan with family or friends. By this way of financing they can still realize their dream and often also on more favorable conditions than with a bank or other lender. But what exactly is a private loan and how do you ensure that both the lender and the recipient have sufficient security? In this article we tell you everything you need to know about the private loan, what the pros and cons of this loan form are and what you should pay attention to.
What is a private loan?
A private loan is a loan in which no bank or other lender is involved but where both people already know each other. It concerns, for example, a loan between family members, such as parents and their children, or a loan that you take out with a friend.
Some examples of private loans are:
- Children who borrow an amount from their parents to buy a house or to be able to carry out a renovation.
- Parents who take out a student loan with their children under favorable conditions
- Borrow money from a family member so that you can start your own business.
The benefits of a private loan
You can take out a private loan for private or business purposes. In addition, a private loan has many advantages compared to borrowing from a bank.
First, private loans are not registered with the Credit Registration Bureau (BKR). As a result, you can also borrow money when a bank or other lender that would normally refuse. But even if you do not want to have such a registration because it can be disadvantageous for a mortgage application, for example, a private loan is a good option.
Another advantage is that you can draw up better conditions in consultation with the lender than you would get at a bank. For example, a longer period to repay the loan than normal. Note: the interest on the loan must be market conform. (We will go into this in more detail.)
Finally, it’s nice to have a good story for a business loan. For example, you do not need to draw up a business plan. You especially need someone in your area who has confidence in your abilities and what you plan to put on.
Disadvantages of private borrowing
Naturally there are also disadvantages to private borrowing. You mainly get to deal with this when it goes wrong and you can not pay back the loan (on time). Although it is often a possibility to negotiate with each other again, it is often accompanied by disappointment, shame and sometimes even a fight. That is especially the case when everything really goes wrong and you really can not pay back the loan. That kind of misery with friends and family is of course not waiting for you and is not what you think about when you take out the loan. But it is wise to take into account in advance that a financial damper is possible.
What do you have to pay attention to?
Even if loans that have been taken out privately are not reported to the BKR, you have to comply with all kinds of legal provisions, especially if you want to benefit from certain tax benefits. But there are also a number of personal considerations that you have to make before you take out a private loan. So where do you have to pay attention when taking out a private loan?
Use an interest rate that is market conform
One of the most important things to watch out for is that you agree (and record) an interest rate that is market conform. Many people have the idea that you can borrow extra cheaply from a family member, but that is not true. Do you want to keep interest rates as low as possible? Then look at the lowest interest rate you can find at a bank when the loan starts and take that interest as a percentage that you use yourself.
If you do not do that, then the Tax Authorities can be of the opinion that it is not a loan but a donation. This means that you then have to pay gift tax on the entire loan amount. You are always more expensive than if you had just chosen a market-based rate.
Note: if the loan is used for buying or renovating your main home, the interest is deductible for the income tax. But for that the interest must also not be too high. So do not agree on any interest that is higher than 6% because then the Tax Authorities can decide not to deduct the mortgage interest as a deductible item and you will miss out on a lot of money.
Prepare a loan agreement
It is very important to record the private loan on paper. Not only for yourself, but also, for example, proof for the tax authorities when they have doubts about your income tax return. This must be in such a loan agreement to be legally valid:
- Name, address and citizen service number of both the lender and the person who lends the money.
- The total loan amount
- The interest percentage against which is borrowed
- How the loan plus interest will be repaid
- What is the term of the loan
- The date on which the loan starts
- The signature of both parties
- What will happen if the loan is not repaid or not paid in time?
You can also download an example agreement from the internet and adjust it to your own situation. You can find these example agreements on the ABN-AMRO website, for example.
Do you find it important to make it all more official? Then you can of course also go to a notary. Then you are sure that you have made the right choices and you have a legally-sound contract that takes into account all possible scenarios.
Do not lend money for purely emotional reasons
Finally, the emotional factor of a private loan often plays a major role. Parents who give their children a nice home are quickly inclined to provide a private loan in order to be able to help directly. And when a friend asks you for a loan to realize his dream of owning a business, it is more difficult to say no than to someone you do not know at all. However, it is not just about being the best person for the other person, it is also important not to lose sight of the purely financial part.
The most important question to ask yourself is: can the other person actually repay the money? As a private person you simply can not go to the BKR and therefore have to assess yourself what the indebtedness of your friend or family member is. When it comes to a business loan, you should therefore not only have confidence in the other person (that is because we quickly have a friend or family member) but also in the plans that are on the table. Finally, it is always best if the lender himself comes up with the idea of a private loan, because if someone approaches you, it is often the sign that the person can not go anywhere else. Finally, you do not have to lend money that you need very much yourself, because then you also run into problems if the private loan is not repaid.
You may also find these related articles interesting:
- How can you borrow private money without BKR testing?
- What is a convertible loan?
- What is a mini loan (without BKR) and how can you apply for it?
- 9 tips if you want to borrow money for a car
- What is a personal loan?
- Can I borrow? How do you know if you can get a loan?
- What is a short-term loan and how do you apply for it?