So I finally found a guy interested in lending me private money but need a little help on what to do first and setting it up. If someone could please quickly walk through a private money deal such as the steps to take… I offered to pay 12% on his money on a one year term so I would basically pay 1% per month and when the property sells he would get the remaining money owed to him? Also he asked if it was 1% per month compound interest and I hesitated as i was not sure what to say…i beleive i should of said no is this correct? Thank you in advance
It is not “compounded” in the way I think he is thinking, it isn’t a savings account. But you can structure it how you want.
The difference is negligible.
On a 100K loan. The interest will be 12K a year or 1K a month. If you were to “compound” daily that means he wants to get paid 12% on the interest that you have accrued each day until you pay him at the end of the month.
Daily interest is about $33 so he wants you to pay 1/30th of a % on $33 on the first day of the month(that is about 1 penny), 2/30ths of a % on the 2nd day (about 2 pennys) etc.
Not even worth the trouble of calculating it.
Hi,
Actually on $100k loan compounded takes the $1k first months interest and add's $120 dollars to it, then at the end of the second month the money would be $2120 plus 12% $254.40 which then makes end of third month $2,374.40 plus $1000 = $3,374.40 plus 12% compound interest $404.93 which makes it $3,779.33 owed at the end of 3 months on a compounded loan for $100k at 12% interest compounded.
On a full year compounded the borrower would pay over $17k interest. Hardly Negligible!
You do not want compounded, you want straight interest at 12%!
Good luck,
GR
I am not following. Can you show your math more clearly?
I think you might be counting your chickens before they are hatched.(claiming interest before it is actually earned) Your $120 for the first month appears to be 12% of the first full year’s interest payment. But in the first month of the loan, the lender has not earned that first year’s interest yet, so it can’t be compounded. You can only “compound” on interest you have already accrued.
And in this case the borrower is paying the interest off each month, so that $12K interest balance is never even accrued. Your calculation would only be correct (I think) if the interest was not being paid. In that case, your $120 compounded would be correct in the 13 month of the loan. (after the $12k of interest owed had accrued) It still would not be correct in the 1st month of the loan.
The idea of compounding with a savings account is getting interest on your interest. So reversing that in a loan situation is paying interest on the interest owed.
In our example, each day he owes $33 in interest but has not yet paid it to the lender. So if he were to pay that 12% annual interest on the $33 for the day, it is 33*.12/365=.0108 or 1 cent.
The next day, he would owe that 1 cent plus another cent. At the end of the 30 days, he pays the full interest and the “compounding” starts over at 1 cent.
Because he is paying the interest in full each month the effect of compounding is negligible. In a savings account the reverse example would be if you withdraw the interest each month. That also greatly reduces the compounding.
Thanks
Hi Eric,
Yea, that's what I get for answering forum questions at 2:00 am after working 20 hours, one of these days I'll learn not to answer technical questions in the middle of the night, You are right of course.
Thanks for pointing that out.
GR
Cool, I was wondering if it was my tired brain!
No worries!
you and anyone else who could use an unlimited supply of private money lenders,and rates can be any that you agree to,some of these people are only making what 3% at the banks so would be happy to be making double or more what they normally would
this was something that i had problems with for years,where to find the money for the deals and or you can also have constant updated lists of people who buy homes in your area[color=red]