Sometimes the requirements imposed by banks and financial institutions are too rigid and strict. It may also be that we need the money with some urgency and the bureaucracy of traditional entities delays it more than we would like. In these situations, we are forced to look for alternative financing and one of the options that we can consider is to request a loan between individuals. However, it is important to know the adversities of contracting one of these loans before launching to apply for it. For this reason, at Lender Credit we want you to fully understand what they consist of and what risks they entail. Shall we start?
Private loan: what is it?
The loan between individuals is a form of financing in which no financial institution participates, only two natural persons intervene: the lender and the borrower. The lender establishes a series of conditions, such as the repayment period and the interest rate, which must be met and accepted by the other party.
In this way, when requesting a loan between individuals, we are reaching an agreement with another person, who will lend us the money we need in exchange for meeting certain conditions. As with other types of loans, the terms of these agreements may vary, so we must take into account the characteristics of the agreement that we signed.
Who can be a private money lender?
A private money lender is a person who offers and loans money to other individuals. They work independently, which means that their activity is not backed by any financial institution. However, at this point you have to differentiate between lenders that operate under the law or those that do so illegally. When we talk about a personal loan between individuals, these are regulated by Law 16/2011 of June 24, which establishes the obligations between both parties. According to this law, if the default of a loan between individuals occurs, the client will face the debt with all his assets, present and future.
Precisely at this point comes one of the biggest drawbacks: loans between individuals usually have a high economic cost and, by responding to them with our assets, we can see how all our assets, including the current account, the home or any other, are seized from us asset that we have in property. On the other hand, we can find lenders who operate illegally, which can be a big problem, since we can be subject to extremely abusive conditions that, in the event of non-payment.
Can pose a risk to our personal integrity
Fortunately, in recent years, the boom in Fintech technology has led to more and more alternatives to bank credit. Thus, entities such as Lender Credit, specialized in online financing services, prevent us from being forced to resort to private lenders. If, in addition, they operate under the philosophy of responsible lending, this will give us the peace of mind of knowing that our debt will not grow indefinitely. However, sometimes we may be tempted by some types of loans between individuals. Let’s see some of them:
Interest-free private loan
Ads for interest-free loans between individuals are rare. By providing services mainly to people who do not meet the requirements to be served by an entity, it is understood that the level of risk assumed by lenders is quite high, so that interests are generally higher among individuals than resorting to a Bank.
As a general rule, non-interest-bearing loans between individuals are those made between family and close friends who do not intend to obtain benefits from the loan. In these cases, the agreement must be formalized in the same way as an interest loan, that is, with a contract signed by the two parties in which the rest of the conditions are specified: amount loaned, repayment term, etc.
If we are faced with an announcement of a loan between individuals without interest, and it does not come from a close friend or family member, it is better to be suspicious, because surely we will have to respond with an endorsement or it is a high risk for us.
Loan between individuals without guarantee
While interest-free peer-to-peer loans are not as common, unsecured loans are quite common. It consists of a loan in which the borrower is not backed by anyone who pays his debt in case he is unable. Therefore, the lender assumes a higher risk, since it does not have the guarantee that the borrowed amount will be returned. Again in these cases we must be suspicious, since, by law, when requesting a loan from another individual, we respond with all our assets, so we can lose everything, even if they have asked for a guarantee.
What is a private loan agreement like?
Just as the request and granting of a loan by an institution to an individual requires the signing of a legal contract that both parties agree to fulfill, when the loan is between individuals, it is also necessary to formalize a contract. Because private lenders are not always as trustworthy as they should be, it is important that the private contract contains all the information necessary to avoid misunderstandings and subsequent problems.
We want to explain what sections and what information is essential in these documents
First, the personal data of the two signatory parties must be included: lender and borrower. Those data are: DNI, name and surname and address in most cases.
Next, a series of clauses must be included in which each of the conditions that characterize the loan is described in detail. They will vary depending on the type of the loan, for example, whether or not it has interests and whether or not it requires a guarantee. The information that should not be missing in the clauses is the following:
The amount of money borrowed.
The borrower’s commitment to repay the loan and the interest rate, if any.
The repayment period of the loan.
Conditions under which the contract is extended in case the debt has not been repaid within the established term.
In the event that the borrower breaches the contract, the lender may terminate the contract before the agreed term of maturity, provided that it previously notifies it by means of a request to the other party.
Applicable legislation to interpret the contract.
Furthermore, it must be specified that both parties intervene voluntarily in the contract and have full legal capacity to sign it.
Finally, at the end of the contract, the lender and borrower will sign and receive their corresponding copy of the formalized document. As we said, we recommend you not to resort to this type of loan, since they pose a high risk to us. Yes, in any case, you have to request a loan between individuals, then it is advisable to have a legal advisor to review the contract and its approval, since it is essential that the contract is well tied to avoid scams, extortion or other problems.