Loaning out money can be an anxiety-inducing experience, especially the first time around. And since a Self-Directed IRA makes it possible to use private lending as part of your retirement plan, that can make it all the more worrisome—you are not only risking your money, but your potential for future returns as well. A Self-Directed IRA administration firm cannot give specific investment advice as to where to put your money. But there are certain private lending “red flags” that you might want to watch out for as you navigate the world of alternative retirement assets such as private loans.
Red Flag #1: Dishonesty
If you catch any whiff that a person is being dishonest with you, it’s not hard to see how that might raise a red flag. Dishonesty is not only worrisome because it provides an inaccurate picture of their current finances, but because it harms the trusting relationship you need to have an effective loan. There’s a reason that banks will have you sign on the dotted line when you take out a loan—they want to keep you honest. They want recourse if something goes wrong. In your private loans, you should make sure that there’s no room for dishonesty.
Red Flag #2: Uncertain Planning
Sometimes, it’s not peer-to-peer dishonesty that’s worrisome. It’s the dishonesty that a borrower seems to have with themselves. If they have not made an effective plan for how they are going to pay back the money, it may be that they are resting on wishful thinking. It would be great if that wishful thinking could pay off for them, but as a Self-Directed IRA investor, you have to know that you’re lending towards a cause that has a realistic chance of turning a profit for them. That, in turn, will make them more capable of paying you off.
Red Flag #3: The Lack of Paper Evidence
Even if you do not quite think someone is being dishonest with you—or rather, you are unable to prove it—the lack of paper evidence for their claims should be a red flag. It might seem to you that this is a step below dishonesty and not quite the red flag of an outright lie, but because this introduces the possibility of dishonesty, it’s still something that you’ll want to consider as prohibitive to moving forward on a loan.
Red Flag #4: Unrealistic Goals or Expectations
If a borrower has ambitious goals, that’s fine. But those goals should be anchored by economic and financial realities. Someone can be completely honest and upfront about why they need they loan. They can submit the appropriate financial information without a hitch. But if their planning is too ambitious or unrealistic for the market conditions, it can still be a bad loan.
Do not cave to unrealistic demands for a loan, either. Someone with poor credit history who wants a major loan for a potentially viable business idea…still has a poor credit history.
Red Flag #5: Family
When you have money to loan out, it’s tempting for people who know you to try and seek out a loan. But you do not want to mix family and finance too much, especially when you are talking about a Self-Directed IRA, in which the action may be outright prohibited.
Set clear boundaries with family. Let them know that you can help them separately from a Self-Directed IRA, but that certain funds you use are for retirement and not for their benefit.