Forget the bank: Financing with friends, family

Gayle B. Ronan

As the mortgage market melted down this summer and the credit markets grew chaotic, Michael McCandless, a Lexington, Mass., software developer, watched with detached curiosity. Unlike most buyers scheduled to close on new homes in mid-August, he knew his lender would come through as agreed.

The reason? The McCandlesses were financing the purchase of their dream home with a jumbo mortgage underwritten by a generous sister-in-law.

Borrowing money from one’s own inner circle is neither new nor uncommon. But it can harbor the kind of mismatched expectations that impact the Thanksgiving dinner guest list for years to come if done with too much informality.

"Typically, it is a case of ‘Here’s $25,000 to open your new business, just pay me back in three years.’ This is a recipe for disaster," says Asheesh Advani, CEO and founder of Waltham, Mass.-based CircleLending, which facilitates private loans. "Even if the business is doing fine in three years, it is unlikely the borrower will be able to make a lump sum payment to repay the loan." There is also the risk that after three years, the borrower will mistakenly remember the loan as being a gift.

Advani says that roughly 9 percent of all households have a friend/family loan outstanding. And while the $89 billion person-to-person loan market may be a drop in a consumer loan market bucket worth trillions, he decided it was enough to base a business on. 

“All our products are designed to keep money in the family [or extended family when it comes to friends] instead of giving it away to a bank. Currently, we have $200 million in loans outstanding,” he adds. 

CircleLending does no actual lending. It facilitates person-to-person loans for a fixed fee, managing the process, documentation and payments. It will even file reports with credit bureaus to help the borrower establish a good credit rating if the parties request it.

The loans it handles range from easily documented "handshake" loans of several hundred dollars to complicated reverse mortgages of hundreds of thousands of dollars designed to keep an ailing loved one in their home and the home in the family.  The fees range accordingly from $99 to $2,500. 

Among these loans is the McCandless’ mortgage. 

"My sister-in-law had friends who helped relatives buy homes.  But they bought the home and then rented it back to the family members. We wanted to build equity in our home," explains McCandless.  CircleLending helped him structure the 30-year fixed rate private mortgage to preserve the tax-deductibility of the interest he now pays and provide a fair return — not to mention the eventual return of principal — to his sister-in-law.

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