Lending Money to Financier for Better Interest – What care should be taken.

POSTED BY sunil ON April 8, 2013 10:53 am COMMENTS (10)

Hello All,

Kindly let me know the below approach is a good one or not (given i have complete trust on the person).

I have one of my friends brother into Financier bussiness, he lends out money on interest in his home town.

I have approached for parking some of my funds with him to get an interest of 18% per year. Below are the points he made.

1. 18% interest per year

2. I can withdraw anytime, but will be getting accumulated interest till that date.

3. Minimum 1 Lac to be invested – I can do it over a period of 3 months

4. I have the previleage to take interest only at the end of the year and can continue with the 1 lac again.

Could you please let me know what all deeds or forms i need to take care of before going into this deal and giving him money.

Thanks a lot in anticipation.

10 replies on this article “Lending Money to Financier for Better Interest – What care should be taken.”

  1. bharat shah says:

    @ashish,
    i do not know exact laws, but credit cards are dealt by banking institutes , and presumably controlled by RBI and others, whereas for making loan paying business , as i understand, the person has to take some license from concerned state govt. authorities and there is some limit, if i am not wrong, @18% or so (again i do not know thorough) , and so , as per my view , lending with such high rates is illegal, and so any contract/ agreement involving such matter.

  2. bharat shah says:

    one more risk, i presume , that lending with such high rate is illegal, and so any contract/agreement.

    1. Ashish says:

      Dear Bharat,

      Just wondering, why you are considering 2-3% per month as a high rate and also illegal?

      Aren’t all the credit cards charging the same? In fact some of them are charging 2.39% to 3.25% which is even higher and while issuing the cards, individuals do sign their forms with all terms and conditioned stated on paper? Isn’t credit card is a form of loan which is completely unsecured and offered to people without any guarantee?

      Your views please.

      Ashish

  3. Dear Sunil, it’s not the default by this brother, I’m telling. I’m asking for the default by the end user of the money, the borrower. Realistically the person who is going in for such high interest borrowing is at the bottom of the economic ladder most of the time & that’s the reason is not able to get a routine loan from normal financial system.

    If you feel, underlying risk is low, you may go ahead. there is more aspect to this – the taxation. In all probability the transactions ‘ll involve cash & thus in simple words it’s black money. Should I add more?

    Thanks

    Ashal

  4. sunil says:

    In a simple language what would be your advice??? to go with it or not???

    I am realistic person and never expect any returns more than 9-10% from my investments, so i will never be lured into GREED…..

  5. sunil says:

    Dear Ashal,

    They transact and lend out money on 2rs to 3rs interest that comes to around 24-36 % interest. They are in bussiness from last 15 years.
    However, this alone will not build trust on them, i agree.

    I agree that money can be a real cruel thing to even seperate friends…. Since he said that we can have an agreement on the lended money, is there any such agreements which gives me right on the money that i gave him and recover if he ever defaults (i agree its not easy though).

    Just weighing the possibilities…. and i might or might not go with him. If i go, i will be testing depths with only few other friends (20-25K per person).

  6. Dear Sunil, now you are on right track. Now answer from a different view, if you are the end user of that money, you w’d be paying around 24% yly interest to that brother. Are you ready to pay that much interest on your borrowed capital? Can you pay continuously that much high rate of interest? Sooner or later, there ‘ll be defaults & when there are defaults, what your trust can do to recover your money as simple as that.

    Thanks

    Ashal

  7. sunil says:

    No Ashal, I don’t say without any risk…… i only wanted to know how do we mitigate the risk? any deeds or agreements that will be made so as to safegaurd the money.

    It’s not at all GREED ashal, infact i have this offer from last 1 year, never did i go for it. I only wanted to know the possibilities of safegaurding the lended amount through agreements. If we have a fool proof mechanism, i am interested , IF NOT – a simple NO.

    I hope i am clear.

    1. Ramesh says:

      No, there are no enforceable deeds or agreements which you can use.

      2/3% per month is a reasonable rate of interest by the way. But then, one needs to take into account the Default rate for which you do not have data (and cannot have too). And since he is giving you 1.5%, you need to understand that besides keeping his own profits, he is taking into account a default rate of 25-50%. If there is a bad monsoon (eg, in a rural setting), the default rate will rise, and your principal is in jeopardy.

      I hope this clears out the mathematics part of the analysis. Your trust or even your friends’ trust does not matter much in this case. Since, it is actually the payment capability of the end-person which is the source of your profit (or potential loss).

  8. Dear Sunil, please go ahead & invest. Your greed of 18% earning ‘ll overcome any sensible advice & we do not want to stop you from your greed. Please carry on & invest immediately. This is one of the best possible investment WITH OUT ANY RISK, you can make. No need to even ask us. Please invest & enjoy the fruit of your HARD WORK. Can you get me clearly? 🙂

    Thanks

    Ashal

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