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Alvin

Private Finance Return Interest

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I have an investor who can provide a private finance to be used for buying a property. I will be adding my own money to it. For whose using investor's money, how do you payback the money loaned and the interest payment. Say 20k is loaned with a fixed interest rate of 10% with pay back after 12 months.

Do you return the £20k + 2k Interest payment at the end of the 12 months and let the investor deal with his tax?

Thank you

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Hi Alvin,

I have not personally been involved with investing or receiving investor's money, but the way I would see it is:

  • Agree upfront the fixed term of the loan. e.g. 20k for 1 year, 2 years, 3 years? etc
  • Agree how often the interest payments are made. e.g. monthly, quarterly, yearly?

Based on the above, let's say that a term of 2 years was agreed with yearly interest payments. You would send 2k at the end of the 12 months, then another 2k at the end of the second year. You would also return the 20k on top at this point too.

In terms of the investor's tax, it is out of your control and it is his responsibility. Just make sure all the proper paper work and contracts are drawn up and signed initially.

At the end of the 2nd year, you could give the investor the option of returning the 20k OR for the investment to enter another contract and continue for another x years so that the investor can continue receiving interest or take back his/her investment.

Hope that helps!

Onkar

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Thank you very much @onkar and @alja nosm. I am going to use the investor's money for a flip, so it won't be feasible to return the interest monthly in my case over the 12 months. It would be on the 12th month or earlier.

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I have been in a similar situation, though I was on the other side as a lender. I made sure we had a loan agreement in place (used an old bridging loan agreement and modified where necessary), and agreed with the borrower the interest wasn't compounding. Could be very tense if at the end of the term the investor assumed the interest compounded and you didn't!

A clear loan agreement setting out the repayment of capital and interest is the best way forward IMO. 

Their taxes are not your responsibility at all, so I wouldn't get involved in that respect. 

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