BiggerPockets

So this isn't really a REI related question, but more of a general investment question. I'm open to anyone's thoughts, ideas, or advice.

I am in the process of doing a loan for approximately $65k. It will be paid back over a 24 month period. It is, for all intents and purposes, unsecured.

What's a fair interest rate?

Thanks

Without collateral, there is NO interest rate/rate of return that would be suffice for my tastes.

Each state also has its own usury laws that define the maximum interest that can be charged in various transactions. You would be wise not to exceed that. If it's unsecured, I would charge the max allowable under the law, if I was going to lend to someone.

If the borrower is qualified to pay the loan back, then:

1. he/she should be able to get a loan elsewhere,
2. he/she should have at least one asset that you could collateralize.

I would hate for you to come back 12 months from now and tell us "I should have listened to the guys on BP."

One of the things I love about this place is the variety of experience and the willingness to help out. Thank you Loc and Will.

I'm not as worried about the security of the loan itself being its unsecured on its own. The loan in question is being used to offset a short term hit to cash flow of an existing business of which I'm an equity partner. It's a complex situation, but as a minor partner, the major partners have asked that the loan not be paid as a lump sum since it would have an adverse affect on operating capital. Being that I'm a good guy, trust the business, and my partners I'm willing to extend repayment terms on the cash. Being nice however is not to say I'm naive, so I'm trying to determine an acceptable interest rate that won't work against my own interests as an equity partner but also allows for an acceptable return on my money.

In trying to determine what was reasonable in this circumstance I realized that outside of some accounting and finance classes in college, notes; bonds; and other debt instruments are pretty foreign to me in this context. Being a personal loan to a company I had a stake in, I don't want to be overbearing since it ultimately affects my equity position - by a miniscule amount, but something nonetheless. I'm also not being overly generous since I am looking for the return on my investment and this is a for-profit business benefiting from my cash.

Hopefully that explains my mindset behind the question itself. The note will be unsecured in technicality except on the credit and reputation of the company hold a stake in and the majority partners. Threats of non-payment are a non-probable possibility and can be mitigated through personal guarantees.

Rephrased, how do I make a fair profit while not trying to be excessive. Where is the balance?

Thoughts?

Brad:

You said " Although the loan is unsecured, I don't have any question about being paid back."

I understand you have faith and confidence in your partners, but, why not be safe and secure some sort of collateral?
How about doing a cash call from all of the partners?

The reason I ask, is that a friend of mine bought a minority piece of a business, and after putting 60k in, the majority partners simply ran it into the ground, and literally squeezed out all of the minority owners to the point that they walked away with nothing.
I'm not suggesting that's what your partners here are going to do. With that being said, my friend's business was short on cash, and, he ended up under the bus. Legal robbery.
How about all of the owners bring their % of the 65k to the table? If nothing else, I'd tell them my spouse said no F ing way without collateral. If so many people here suggest getting security, I think you'd be totally crazy not to, especially if it's available. I'm curious to see how this shakes out.