Individual and private lenders: regulation and risks

We go over what the law says with regard to these loans and what precautions should be taken before resorting to them.

Private individual lenders have always been around; however, they have become more popular in recent years. What's more, in times of crisis, they have turned into an increasingly common financing alternative. We go over what the law says with regard to these loans and what precautions should be taken before resorting to them.

Loans between individuals have always existed and are, in fact, one of the origins of he modern banking. With the professionalization of the sector and the regulation of loans, private individual lenders were left on the sidelines in favor of banking institutions. However, they didn't disappear altogether. In fact, nowadays many people have started resorting to private individual lenders once again, faced with the impossibility of obtaining financing in other ways. However, these customers are not always clear about what regulation their loan will work under.

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How a loan between individuals works

The mechanics of loans between an individual and a private lender is very similar to that of a loan with a banking institution or short-term credit: the creditor provides a certain amount of money to the debtor, who undertakes to repay it in the time stipulated, together with interest payments that will have been specified in advance.

However, private individual lenders usually offer the money at much higher interest rates than any bank. In some cases, the interest rate can reach 30% of the amount loaned. This method of financing is therefore much more expensive than loans granted by the banking sector. Furthermore, the repayment period is usually quite a lot shorter than that offered by banks, so the customer has less time to repay the money and avoid paying late-payment interest charges, to mention one of the possible repercussions.

On the other hand, the requirements set by private individual lenders when granting loans tend to be less strict. Typically, the requirements are agreed upon between the two parties and, depending on the amount loaned, may involve the debtor's home being mortgaged.

The regulation of loans between individuals

To know what they law says with regard to this type of loan, we have to pay attention to the repayment guarantees that are established.

Any mortgaged loans that are established are regulated by Act 2/2009 of March 31. This law sets out the rights and obligations of both parties.

On the lender's part, they must be registered in a public file, hold a public liability insurance policy or a bank guarantee and must comply with all the regulations with regard to financial transparency.

On the customer's part, they must repay the money lent in the conditions agreed. Otherwise, they may be included in the files of payment defaulters and be required to cover the outstanding debt with their home.

However, Act 16/2011 of June 24 applies to personal loans. This law regulates consumer loans and also establishes obligations for both parties, the most important of which is that in the event of non-payment, the customer is required to cover the debt with their present and future assets.

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Risks associated with private individual loans

The main risk involved in using this type of financing is the high financial cost. As we have already mentioned, these loans usually have interest charges that are well above market rates, making their repayment more difficult for the customer.

In addition, these types of loans are not guaranteed by the Bank of Spain. Therefore, due to the risk that this entails, customers must be aware of their contractual obligations to avoid any unwanted situations.

Regarding this point, it is fundamental that all the terms and conditions of the loan are detailed in a public deed signed before a notary public.

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