Borrowing and Lending with your Self Directed IRA

Many people are unaware that they can give loans to others from their self directed IRAs. This is actually fairly safe as long as the loan is secured. Usually, loans that are secured with real estate or something of great value are the safest, but really anything can secure the loan. Best of all, making a loan with your IRA can be beneficial both for you and for the borrower if you collect interest on the loan. In the event that you have to foreclose on the loan, you’ll make even more money in the process.
You can also use your self directed IRA to borrow money as well. As long as you know someone else who has an IRA, you can borrow money from that person’s IRA. As a borrower or a lender, the interest rates and loan terms need to be constructed carefully. They must be within all legal constraints and they also must offer fair rates to both parties. Without this, your venture will most definitely fail or you won’t even be able to start it to begin with. As a lender, you need to offer a competitive interest rate that still benefits both of you. As a borrower, you want to avoid lots of fees or extra hassles. This is especially important in high pressure sales like foreclosure loans and the like.
Another important thing to realize from the lending perspective is that your IRA will grow. The extent of how much it grows depends on whether or not the borrower pays off the loan, which is actually bad for you, either way though, you will make money. The borrower will be responsible for all legal fees associated with creating the loan documents and for any fees charged by your bank. So, you’re not out any real money, and if you end up making a foreclosure on the loan’s collateral, you can make a pretty penny.
If you think the amount of your IRA is too small to make hard money loans, you can combine it with other self directed IRAs, as many as it takes. This way even the smallest of IRAs can participate in the process, make interest, and in the long term, collect money. All that is needed is an IRA; the amount really doesn’t matter at all. No matter how many IRAs are involved in the process, however, you’ll want to avoid usury at all costs. Usury is when you contract to receive interest outside of the legal limit, and it is illegal. The limits are defined by your state of residence, so do your research and know the rules as they pertain to where you live. You can be punished for usury by losing the principal on the loan and the damages up to three times the interest. Depending on your state, you might even face criminal charges as well. To avoid this, speak with an attorney before going through with any loan.

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