Private credit to individuals - how to proceed?

Investing / Others
1

I have a friend who’s a bit short on the “hard capital” requirements against his house purchase.

It’s a question of bad timing - a property sale abroad takes longer, move-in date is closing in.
He could only bridge the risk with a higher interest product (private credit or such) which would cost him approx 10k extra.

As I have the capital, I’m glad to bankroll him, but also don’t want to fall into a “lending to friends, who might later get into trouble” pit in case anything goes sour.

If anyone here has ever done this, how to do this properly? What could be my guarantee?

  • We will have a paper contract, but that’s quite thin, apart from the debt register as a lever. Is this enough in CH?
  • can I (/should I) register myself on the deed on the to-be-purchased property in CH (as second after the bank), and does it bring any security to me? Would that bring me into a 3-party contract for the house purchase? What would be the simplest form?
  • I could register myself on the property abroad, which is a sure thing if it ever gets sold (but it adds a timing uncertainty, some lawyer fees and some burocracy).

What would you ask for interest in such a p2p (may I say friend to friend) transaction?

We are talking about 50-100k CHF.

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https://en.comparis.ch/privatkredit/kreditarten-schweiz/darlehensvertrag

I would say this is a very common thing, a written and signed contract is enough.

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3

I’m not a law expert but things that go beyond the loan agreement put forward by Dr.PI, especially if involving a notary, may not be worth the risk/cost/benefit assessment vs the 10k additional cost of having it done by a third party.

My understanding is that they could get the required liquidity but it would cost them more. 10k shouldn’t be make or break in a real estate purchase so, while doing my own assessment, I would consider that a viable option vs lending the capital myself.

That extra 10k is the amount assessed by other lenders to cover the risk they would be taking. I would consider it as close to the actual statistical risk I would be personally taking making that loan (make it the risk free rate away from it - iShares Swiss Domestic Government Bond 0-3 ETF (CH) currently has a 1.1 year average maturity and a 1.17% weighted average yield to maturity - so roughly 9-19% chances of not seing my money back).

For the interest rate, I would factor in at least your expected opportunity cost as that’s the loss you expect to incur in order to provide them with this opportunity.

I could do it for a very good friend (I’ve done it for way lesser amounts (of 2k-5k) with the expectation that it was a gift and not a loan, which is the mindset I’d recommend to protect the relationship). I’d be hard pressed to go through such a deal with someone closer to an acquaintance.

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4

As an additional precaution, you may want to perform transaction by a bank transfer, indicate as a transfer reason that it is a loan and keep the transaction confirmation. Maybe even as a paper printout :grinning:.

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5

With proper contract and amortization schedule, registered as second lien on the house in Switzerland: 2.5% to 3% (as an unsecured loan: 10%).

Does your friend’s bank know about this, because this is the opposite of hard capital?

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Would this jeopardize granting the mortgage if they knew?

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7

Yes

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8

Thanks all - in the end I walked away. Too many risk concerns on the buyer’s side, and as someone has put it, money issues don’t mix with friends very well.

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9

I agree. I learned the hard way - never lend. If you want to help, just give. And unless you’re super good friends and rich, 50k-100k is a bit too much for a gift.

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