Top 07 Mistakes You Should Avoid When Lending Money
When lending money, one should be careful and treat the decision with due diligence. In this blog by 1ONEFUND, we’re going to show you some of the biggest mistakes people make when approving loans as well as what types of checks can protect you from such errors, either for your own need or to protect someone else.
Mistake 1: Expecting an Income Stream
When you loan money to someone, it’s important to remember that you are not simply giving them a gift. You are making an investment, and as with any investment, there is always the potential for loss. One of the biggest mistakes you can make when loaning money is expecting an immediate income stream in return.
Just because you loaned someone money doesn’t mean they are obligated to start paying you back right away. In many cases, it may take months or even years for the borrower to be in a position to start repaying the loan. If you need the money back immediately, then lending money is probably not the right option for you.
Another mistake related to this is assuming that the borrower will be able to make regular payments on time. Life happens, and there are always going to be unforeseen circumstances that can cause someone to miss a payment. If you’re not prepared for this possibility, then you could end up taking a substantial loss on your loan.
Finally, don’t forget that interest must be paid on any outstanding balance owed. This is something that many lenders forget about until they start getting calls from angry borrowers demanding why they’re being charged interest on their loans. If you don’t plan on charging interest on your loan, be sure to make that clear upfront so there are no misunderstandings later on.
Mistake 2: Not Having Clear Terms
When you loan money to someone, it is important to have clear terms set up between the two of you. This means that you should clearly state how much money is being loaned when it is due back, and what the consequences are for not paying it back on time. Without clear terms, there can be a lot of confusion and misunderstanding about the loan, which can lead to hard feelings and even legal problems down the road.
Mistake 3: Adverse or Changing Interest Rates
When the interest rate on loan changes, it can have a major impact on the affordability of the loan. If rates go up, your monthly payments will increase, and you may not be able to afford the loan. If rates go down, you may be able to refinance the loan at a lower interest rate, which could save you money.
Mistake 4: Ranking Preference – Active Loans
When considering a loan, many people focus on the interest rate. While this is important, it’s not the only factor that should be considered. The application process, fees, and repayment terms are also important factors. One mistake that people make when lending money is ranking preference based on these factors.
Many lenders will offer different interest rates for different types of loans. For example, a home equity loan may have a lower interest rate than a credit card. However, the home equity loan may also have closing costs and other fees that offset the benefit of the lower interest rate. In addition, the repayment terms for a home equity loan are usually much longer than for a credit card. This means that you’ll end up paying more in interest over the life of the loan.
When you’re considering a loan, make sure to compare all of the costs and terms before making a decision. Don’t just focus on the interest rate. Instead, consider all of the factors involved in order to choose the best option for your needs.
Mistake 5: Weakening Your Position by Borrowing Money from Friends and Family
One of the worst things you can do when lending money is to weaken your position by borrowing money from friends and family. Not only does this put a strain on your relationship, but it also gives the person you’re lending to an upper hand in negotiations. If you must borrow money to lend, make sure to get it from a source that won’t be emotionally involved in the situation.
Mistake 6: Concentrating Too Much On One Client
While it may be tempting to funnel all of your money lending resources into one big client, this is generally not a good idea. If something goes wrong with that one loan, you could be in serious trouble.
It’s important to diversify your clients so that you’re not putting all your eggs in one basket. This way, if one loan goes bad, you won’t be left high and dry. Make sure to spread your risk around by lending to different types of people in different situations.
Mistake 7: Accepting Volumes of Business, No Matter What the Circumstances
If you’re in the business of lending money, it’s important to be choosy about your clients. Just because someone needs money doesn’t mean that they’re a good candidate for a loan. There are a variety of factors to consider before extending credit, and if you are lax in your standards, you could wind up with a delinquent borrower.
One mistake that lenders often make is accepting volumes of business, no matter what the circumstances. While it’s understandable to want to grow your business, you should be selective about the clients you work with. If someone has a history of not repaying their debts, it’s likely that they will default on their loan from you as well.
It’s important to carefully screen potential borrowers before agreeing to lend them money. You should review their financial history, including their credit report, to get an idea of their ability to repay the debt. You should also require collateral for the loan so that you have some security in case the borrower defaults.
By being choosy about your clients and requiring collateral, you can minimize the risk of losses due to Default loans can be costly and time-consuming to collect, so it’s important to avoid them if possible.
For a free consultation regarding Money Lending queries, call/contact 1ONEFUND Financial today!