Private lending is an old business indeed. Long before banks, finance companies, trust companies and credit card companies, individuals borrowed money from one another in exchange for interest payment.

 

An ancient form of investing, one which by its nature, pre-dates the modern stock market (which itself is less than 100 years old), is private mortgage investing. For as long as humans have laid claim to real estate, it has been used as security (collateral) against cash advances from lenders. From the merchants of China, to the Sahukaars of India, the Metics of Greece or Argentarii of the Roman Empire, lending money secured by real estate has long been established and proven by generations of individuals. Most lending however, was done by and between individuals, rather than through bankers or mortgage companies.

Many times the loans were secured by personal assets like chattels (personal effects) or real property (land or building); other times, the money was loaned without security, on the strength of a person’s reputation and good standing in society.

Modern day private lending is simply a continuation of the old practice: an individual with surplus money, will loan some to another individual. The loan is based upon the expectation that the monies will be repaid in an agreed manner, with interest.

When a person loans money to another, they are investing in the borrower. The interest rate at which the loan is set, is equivalent to the return which the lender expects to get from his or her investment. Many lenders will invest in private loans because the returns they generate are greater than what they can earn from investing money elsewhere.

Private lending is not without risk. The risk that a borrower does not pay back a loan is very real; however this is offset by doing a background check on the borrower to make sure that they have the character to want to pay back the loan, the income capacity to be able to make the monthly payments, the good credit history to show they have met previous credit obligations successfully and the collateral to secure the loan - just in case something wrong happens. If the borrower cannot satisfy any of the preceding four conditions, you may end up investing your hard earned money into a headache.