How To Make and Collateralize a Private Loan

Your brother-in-law needs a loan. Once you get past the fact that you really don't want to give it to him and you actually are ready to lend him the money, how do you make sure you get your money back if your sister throws him out and he decides not to pay?

First, have him sign a promissory note with specific terms (payment due by, interest rate, what constitutes a default, etc...) prepared by an attorney. The promissory note will allow you to go to Court and get a judgment for the amount due if he doesn't pay.

Then, secure the loan. Without making this too complicated, there are several guarantee/collateral options:

Guarantees: If providing a loan to an entity (corporation or LLC), a personal guarantee can be provided by the entity's owners, the owner's spouse, or any individual or entity that you feel may be more credit worthy than the borrower.

Real Estate: You can file a mortgage on the borrower or guarantor's residential or commercial property. You would have to evaluate the value of the properties and any mortgages or liens already filed on the properties. To the extent the borrower or guarantor has multiple properties, you can file a blanket mortgage to cover some or all of them.

Life Insurance: You can require the borrower or guarantor to purchase a term life policy to cover the amount of the loan in the event of the borrower's or guarantor's death.

Receivables: You can get a security interest in the borrower's receivables; however, you would have to evaluate/appraise these receivables and get a judgment and lien search completed to see if the borrower has already pledged these assets to determine the priority of your security interest.

Personal Property: We can get a security interest in the borrower's or guarantor's personal property (vehicles, desks, computers, jewelry, art, etc...); however, you would have to evaluate/appraise these assets and get a judgment and lien search completed to see if he has already pledged these assets to determine the priority of our security interest.

Securities: The borrower can pledge stocks, bonds, and securities, both private and issued or guaranteed by the U. S. government. The borrower can also provide a collateral assignment of his ownership interest in one of his companies.

Letters of Credit: You could get a letter of credit issued by a bank to secure the amount due. This type of collateral provides almost guaranteed repayment.

Confession of Judgment: You could ask the borrower to sign a confession of judgment that allows you to go to court and get a judgment upon a default of the promissory note without commencing a lawsuit.

Remember, the borrower is generally responsible for the cost of any searches and the filing of any mortgages or security instruments. The borrower also usually pays the lender's attorney to prepare the necessary documentation.

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