New: Payment reminders and loan sharing

We recently launched 2 new features that we hope makes your personal lending experience easier and more successful. The first feature, payment reminders, allows LoanBuilder users to opt in to receiving an email reminder to either make a loan payment (if you're a borrower) or collect a payment (if you're a lender). If you've already setup a loan using LoanBuilder, you can turn on reminders by going to your My Loans page and clicking the Set Reminders link.

Loan sharing is a feature that is especially useful when you're first setting up your loan. After you create a loan and register, you can then invite other people to "join" your loan. Once someone joins your loan, they can edit loan terms or other loan information. These edits are conveniently tracked within your My Loans page so that you can track any edits that have been made, whether by you or another party.

We hope you find these two new features valuable.

New: Interest-only Loans

That's right, you can now use LoanBuilder to create interest-only loans! Since we launched, we've had several folks write in to us asking for this option and it's not that surprising given the growing popularity of interest-only loans in the mortgage world.

Here's how to create an interest-only loan:

1) Get started using our LoanBuilder and click the "Build my loan" button.
2) On the Loan Calculator, select "Interest only" in the Payment Type field. (see above image)
3) That's it!

When the Interest only option is selected, the borrower will make interest-only installment payments and one balloon payment for the outstanding principle on the loan at the end of the term.

We are also considering the following types of loans:

*Variable rate (e.g., you could set the interest rate to be Prime Rate or peg to other index)

*Adjustable rate (e.g., you could set a flat rate for the first few years and then let the rate adjust to an index. Think ARMs in the mortgage world.)

*Demand payment (e.g., you keep the loan repayment date open so the lender can "demand" repayment at any point. Note: we already offer this type of loan as a blank form.)

If you'd like to see us build any of the above features, or anything else, please let us know.

Introducing Blank Promissory Note Forms

We just launched a smattering of new promissory note forms on our site. These blank forms--you have to fill in the blanks--are good for people who know exactly what kind of note they are looking for and also understand how to create loan amortization tables and other financial calculations. We currently offer 8 different note forms. For those of you who don't know exactly what you're looking for, and don't want to do math, we think using our LoanBuilder is the best way to go.

Let us know if there are other forms or features you'd like to see us create.

On charging interest

One of the more pressing questions people have when considering making a loan to someone they know is whether or not to charge interest, and if so how much. First I'll share some personal opinions on this topic and then share with you some cold, hard data on what real LoanBack users are actually doing.

I think charging interest on personal loans is a good idea for several reasons:

1) Lenders deserve to be compensated for the risk they're taking. After all, we all have plenty of alternatives for parking money. Hell, Emigrant Direct will give you 4.50% for almost no risk at all! With a loan -- like stocks, bonds and other investments -- there is risk of losing money. Lenders should require a return commensurate to the risk they are taking.

2) Successful personal lending starts with the borrower treating the loan as if it were from a bank. Since you are reading this, you already know that the best way to get borrowers to take the loan seriously is to draw up a Promissory Note. The next best thing is to charge interest. Doing so sets the tone of the relationship which should be one of friendly professionalism.

3) Avoid Tax implications. If you're lending more than $11,000 which is the maximum amount the IRS allows for individual "gifts", you should charge a minimum of 4.38% interest (the Applicable Federal Rate or AFR) so that the IRS won't consider the loan a "gift" and thus count against your gift limit. You can learn more about the AFR at the IRS website.

As for what rate is appropriate, I think it depends on the use of the loan and the situation. If the borrower is a good credit risk and wants to by a car, charge an interest rate a point or two below the market lending rate for auto loans. If the borrower is consolidating other debts and can't get credit, then charge a market rate or above-market rate. A great source of information on market lending rates is BankRate.com. If this monthly payment is too high, extend the term by a year and see what that does. One great benefit of personal loans is you can play with the variables of amount, interest rate and term to come up with the payment that meets the borrowers budget. Of course, there will be times when you don't think charging interest is appropriate. That's a judgement call that a lot of people decide to go with.

Enough of what I think. Let's look at what real-life LoanBack users are doing...

In February, over two-thirds of LoanBack users created interest-bearing loans. The average interest rate charged on these loans was about 8%.

It's interesting to note the effect of collateral on lending rates. Not surprisingly, LoanBack borrowers who put up some kind of "security" or collateral, got cheaper money than those who did not. The average interest rate for loans secured with collateral was 5.62% while the average rate for unsecured loans was 10.1%.

Note to borrowers: put up collateral when borrowing money from someone you know! You can clearly get a better interest rate if you do.

Why lend money to friends or family?

There are lots of reasons people borrow and lend money to friends and family. Here are the top reasons for personal loans made on LoanBack:

1. To pay off other loans
2. Working capital for existing business
3. Real estate purchase
4. Car purchase
5. Startup captial for new business
6. Downpayment on a house
7. Education expenses

The average loan amount that we see is $26,972 with an average interest rate of about 5%.

Considering the high levels of personal debt in the US, I'm glad to know that some of us are doing something about it. Borrowing money to pay off other loans is a smart thing to do, especially if you can find somebody to lend you money @ 5%!

Let's take an example scenario to guage the impact of doing so...

Let's say you have $10,000 in credit card debt @ 18% and $10,000 left on your car loan @ 8%. Suppose your "plan" is to become debt free in 5 years. If you keep your debt as it is you'd have to pay $456.70 every month for 60 months to pull it off.

Now, let's say you approach your brother for a loan of $15,000 @ 5%. He's happy to help you out and he gets a better rate or return than his current money market account. You end up paying your brother $377.42 each month and save a total of $4,756 over the course of 5 years! Not a bad chunk of change to pocket and oh yeah, your brother earns $2,645 in interest. Sounds like a win-win to me.

Hill

New Features Live!

We just launched the new features I described below. We are now charging a small fee help cover our expenses. Please let us know if you have any feedback or suggestions by either commenting on this post or using our feedback form.

Thanks!

Hill

New Features Coming Soon

Well, we've been live for a few weeks now and the response has been great so far. Thanks to all of you who send us feedback -- we really appreciate it. I wanted to let you know what we're working on in the way of new features.

In the next few weeks, LoanBack will let you...

1) Secure your Notes with collateral. Many of you are borrowing and lending money to buy new or used cars. An auto loan is a good example of a loan that should be secured with collateral. When you secure your Note with collateral (in this case, the car), the Lender should feel more comfortable because he gets something of value if the borrower doesn't repay the loan. The good news for the borrower is that when they agree to secure their Note with collateral, they can confidently ask the lender for a lower interest rate since the loan is now less risky.

2) Add Late Payment Fees to your Note. It's always a good idea to have some kind of penalty for late payments (sorry borrowers, but it's true). You'll have the option to define "what's late" as well as determine the late payment fee amount.

3) Allow Lender to transfer the Note. This is a nice feature for those Lenders out there who want to sell their Note. Some of you out there who loan money may wish to literally sell your loan to another party. There are business out there (like this one) that will by your Promissory Notes. Of course, there are also Collections Agencies out there that specialize in collecting debt (ouch!).

4) Allow for additional loan terms. You'll be able to create custom sections of the Note to add any custom terms you may want to include.

5) Allow for multiple borrowers and lenders. In some cases, personal loans may include more than one borrower or lender. We will soon be able to document these types of situations.

So that's pretty much it for the next release of the product. If you have other feature ideas, please send them to us! We love to hear from you.

Hill