Lending money to colleague with interest - how to legally bind agreement
A colleague of mine has student loan debt of ~35K at 7% APR interest. I have more than enough principal to pay off his debt, and for my troubles (and risk), I think asking for a 4% APR is not out of the question. Assume a 0 monthly minimum payment until it is payed off.
I understand there is risk involved with doing this - If he goes ghost on the loan, I would have to take him to collections, and the legal fees might outweigh any benefit I would have gained. But assuming all goes well, and he remains gainfully employed until he is able to pay back the loan (plus interest) in full, I stand to make a decent amount of money on this loan.
What is the easiest/safest way to make a legally binding agreement, and to keep track of said loan/balance? Are there any websites/third parties that can handle this for me? I suppose this is akin to how my mortgage is owned by Freddie Mac, but is serviced by PHH Mortgage. Are there any 3rd party servicers that would assist in personal loans such as this? Are there any risks I am overlooking?
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Are there any risks you're overlooking? I think if you're considering this at all you're overlooking all of the risks... namely, if you think the issue with him not paying on the loan is the procedure involved with initiating collections or taking him to court for a judgement you're severely underestimating actually collecting after you're awarded a judgement. Typically when people stop paying a debt, its because they don't have money. A judgement doesn't change that.
Now you could include in the promissory note a lien on some piece of his property, if he has one. Even with the lien and a judgement against him you can't do much.
There are laws related to lending by individuals, related to debt collection, maximum/minimum interest rates; there may even be a law that mandating individuals may only assess simple interest. I doubt you'll be able to find a formal institution that will take over as nothing more than an administrator, though you might as well start researching how to sell the debt once your colleague defaults.
IF you can legally amortize the loan at 4% and 0 per month, you're not made whole until about month 78. Months 79 through about 90 will be your profit zone. At this rate of return I'd just buy a muni...
If you're willing to kiss this money good bye, and lending it generates more amusement to you than setting it on fire, go for it!
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