I would like your advice on giving a hard-money loan to the man I’ve been dating for five years. He pressed me on this issue three years ago. I didn’t do the loan then, and it was a serious issue between us. The term of the loan that he secured with a third party was three years, which is now expiring. He wants and expects me to loan him $165,000 now.
He paid $1,100 per month to the previous lien holder, but he wants me to take no more than $500 a month, and to allow him to keep $15,000 of the loan as a “cushion“ for the future. He says he has enough equity in the house to cover my loan. He also wants a five-year term. I’m 74 and he’s 65. Given that, I don’t want to be tied to a five-year commitment to that money.
Also, he has a pending bankruptcy (his second bankruptcy), and he works for himself as a website builder. We live in Nevada. He tells me this is a great deal for me, as I am protected because of the equity in the house, and that I’m earning 5% on my money. I would appreciate your thoughts on this issue. Time is critical, because he needs the deal done the first of May.
Your thoughts, please. Is this a good deal, or should I run for the hills?
What to Do
Dear What to Do,
Oh, boy. There are three reasons to reject his request on principle:
1. You already said no, and it’s not respectful to not keep haranguing or pushing you to change your mind. If you were a bank, and he kept coming back asking the same question and putting pressure on the loan officer, he would be escorted out of the building.
2. He is on the brink of his second bankruptcy, the ultimate sign that someone is not financially stable, or knows how to manage his finances. That’s a clue that you are not helping him or yourself by becoming embroiled in his financial affairs. What are the bankruptcy rules in Nevada? A bankruptcy attorney will be able to tell you what would happen to this loan during and after bankruptcy proceedings.
3. You have a relationship with this man, and asking you to loan him money — with or without his real estate as collateral — mixes finance and romance. The two rarely, if ever, make suitable bedfellows. It creates an unhealthy, codependent dynamic. (Where would this $165,000 be coming from? A bank account, retirement account, or non-qualified brokerage account? Consult a tax adviser.)
And now three reasons why the offer itself is not attractive:
1. You are correct in your concerns about the loan itself. At the age of 74, you are wise not to get mixed up in a financial commitment over a five-year period. This should be a time in your life when you are enjoying life without financial worries — not inviting more into your life.
2. A 5% interest rate is significantly lower than the interest rate on most hard-money loans. But that does not take into account the risk/reward. You don’t need to earn 5% on this amount of money, and it’s not worth the worry and stress such an arrangement would bring. What’s more, under the terms that your partner proposed, the loan principal would actually grow to $177,609.46 by the end of the 5-year term. (Present value of loan: $165,000. Interest: 5%. Number of payments: 60. Payment: $500/month. Future value of loan: $177,609.46.)
3. Changing the terms of the loan repayments from his previous loan agreement also shows a lack of good faith. Asking to keep $15,000 as a cash cushion is another red flag. He is using your romance as leverage to structure this deal. It’s a final nail in the coffin.
Finally, time is critical — for him, not for you. Before any loan, an individual or financial institution should establish their own timeline to do due diligence. Timeshare and second-hand car salespeople have been known to wear down potential investors under pressure. Real friends do not.
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