Loan Money Like a Bank

Wouldn’t it be nice to be a bank and lend money out for a 30-year mortgage at a fixed rate of return secured by the property itself? While there are many steps and hurdles to becoming a bank before you can begin accepting other people’s deposits into a checking or savings account, there is nothing stopping you from loaning your own money.

We are not talking about giving your friend $20 and collecting 10% interest as they pay you back in a week, although you could do that. There is a more formal process for treating your savings as a bank would and lending money out to people. Welcome to the world of Notes, and more specifically, Promissory Notes.

A promissory note is a written promise to pay someone. This is a common tool in the financial services industry and if you’ve taken out a loan of any kind, you’ve almost certainly signed one. A Note can be either unsecured or secured. An unsecured note carries more risk because there is no security if the borrower fails to pay; it can be very difficult to collect from them. A secured note, on the other hand, is secured by collateral (a house, car, raw land, or assets from a business). For example, if you loan someone money to pay for a property, you can draft a secured note and have the house as collateral. This means, should the borrower fail to make payments, you can legally own the property so you can be made whole.

WHAT SHOULD BE INCLUDED ON THE PROMISSORY NOTE?

1. The date of the promissory note should be at the top
2. The amount of the note
   • The amount of the loan should be written numerically, as well as in words (similarly to how you would write a check).
3. A description of the terms
   • There should be a written description saying how the borrower is going to repay the loan. This could be monthly, quarterly, annually, or even in a balloon payment (one lump sum).
   • You will also want to state when the first payment is due by writing out the month, day, and year.
   • Finally, indicate when the last day and month for the final note payment is due.
4. State if the note is secured or unsecured
   • If the loan is unsecured, state this in the note and be specific.
   • If the note is secured, provide details on the security instrument.
5. Include the name of both the lender and borrower of the note and make it clear which person is which
6. Provide specific details on where each payment should be made
   • This could be either check delivery instructions indicating your name and address to mail the check to or, ACH/Wire delivery instructions if they will be sending funds directly to your bank account.
   • When lending money from your IRA, your borrower must make the monthly payments directly to your IRA and not send them directly to your bank.  
7. Print, sign, and date
   • The borrower(s) should print, sign, and date with their legal name. If there are multiple borrowers, each one should have a line to print, sign, and date. The lender may also sign, though this is not required to make the note legally binding.

WHAT IF THE BORROWER DOESN’T PAY?

It can be very frustrating when someone doesn’t abide by the written note agreement, whether it be inconsistent payments, late payments, or no payments. If you find yourself in this situation you may want to consider:

• Reaching out to your borrower in a format that may be retained (email or digital chat).
• Sending a formal notice by email and mail to the borrower. If there is no response to the letter, send a follow-up letter.
• Hire a collection agency.
• Take them to court.

Loan Servicing
Unless you are paying a third party to be a loan servicer, it is the lender’s responsibility to collect payments, provide an amortization schedule and provide payoffs upon request to its borrower.

Did you know you can loan money from your IRA account? Learn more here.

If you have questions or would like more information about money lending with an IRA account, contact Midland at (239) 333-1032 or visit www.midlandtrust.com.

MIDLAND TRUST IS NOT A FIDUCIARY: Midland’s role as the custodian of self-directed retirement accounts is non-discretionary and/or administrative in nature. The account holder or his/her authorized representative must direct all investment transactions and choose the investment(s) for the account. Midland has no responsibility or involvement in selecting or evaluating any investment. Nothing contained herein shall be construed as investment, legal, tax, or financial advice or as a guarantee, endorsement, or certification of any investments.