“Mom, I really hate to ask but…”
Many have, at some point in their lives, either heard or uttered similar words. Asking family or friends for money can be awkward, and “loans” that are never repaid can destroy relationships. But Virgin Money aims to manage private loans and help keep relationships from turning ugly.
Though it has officially been under the Virgin umbrella since just last October, CircleLending—as it was originally known—has been operating for six years and has helped customers do more than $200 million in loans, according to the company’s website.
CircleLending was founded by Asheesh Advani. While working at the World Bank and studying worldwide markets for informal capital, he discovered that there was a large amount of friend and family lending happening in North America, and that these loans had extremely high default rates averaging more than 14 percent, according to Helen Payne Watt, director of content for Virgin Money.
“[Advani] realized that with a simple application of documents and servicing to those loans, basically giving it the structure that a bank would give it, that you could dramatically reduce the default rates,” Watt said. “Give it the credibility and structure [of a bank], but continue with the flexibility of the friends and family style.”
Before Advani created CircleLending, the options for those handling friend and family loans were few. An attorney can document the loan and an accountant can handle the servicing and reporting, or a promissory note can be printed and the lender can try to handle repayment, Watt said. “But…we’re the only business that can do the entire package for you. And we do it with customer support the whole way along.”
The people involved decide on the final terms of the loan, but Virgin Money can educate and guide them through the process. Virgin Money is there to inform individuals about tax laws, minimum and maximum interest rates and offer guidance and suggestions based on what has worked for others in the past, Watt said.
These services do have a fee. The initial price for setting up a real estate loan through Virgin Money is anywhere from $249 to $2,299, with services ranging from documentation to managing payments, handling the title search and creating an escrow account. Full Servicing—documentation and management of electronic payments—costs $699. Processing fees start at $9 per payment.
The idea is that, when managed correctly, loans between family and friends can ultimately benefit both the borrower and the lender.
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When receiving a loan from friends or family, borrowers are likely to get a much better rate than they would on a traditional bank loan.
“Interest rates tend to correlate really closely to the closeness of the relationship,” Watt said. “So, if it’s a parent [and] child, you’ll have someone with a lower interest rate. You’ll even have zero percent in some cases. But if the relationship becomes more distant—say in a seller financing transaction, where you just have a real estate investor who’s turning properties and financing the borrowers as they come through—you’ll get higher rates.”
The national average rate on traditional mortgages is 6.35 percent for a 30-year fixed rate mortgage and 5.9 percent for a 15-year fixed rate mortgage, according to HSH Associates Financial Publishers.
In contrast, the average rate for a mortgage between family members managed by Virgin Money is 5.25 percent, according to Watt. Over long-term loans, rates lowered by even 0.5 or 1 percent can ultimately save thousands of dollars. The average rate on Virgin Money’s non-family mortgages is 7.5 percent, Watt said.
Another benefit for those choosing to borrow from friends and family is that, in cutting out the middleman, a great deal of time and stress can be saved. Traditional mortgage loans can take anywhere from seven to 30 days to process and close because they require credit checks, title searches and physical appraisals of the property before final approval is granted. This is not the case when the money comes from someone the borrower knows.
“When there are loans between individuals who know each other, there’s no application process, there’s no filling out of forms, there’s no credit check. All that is [satisfied] based on the relationship,” Watt said.
Payment plans can be established that meet the borrower’s specific needs. For example, if the borrower works in a seasonal industry, such as tourism, payments can be adjusted seasonally to reflect his or her cash flow, Watt said. And if a borrower comes upon hard times, it’s much simpler to go to the lender and receive a temporary deferral if there is a relationship. Lenders can opt to defer payments, move a particular payment to the end of the term or forgive it altogether, according to Virgin Money’s website. This allows for flexibility that is not possible when dealing with a bank or credit card company.
“Banks will foreclose on the property but parents will tend to restructure,” Watt said. “When you have a family relationship involved, the lenders tend to do as much as they can to avoid foreclosure, whereas you don’t have that incentive from a bank or a mortgage company.”
Borrowers can pay their lenders automatically with electronic payments through Virgin Money. With the entire process handled by a neutral third party, borrower and lender don’t even have to talk about the loan if they choose not to.
For those who may be thinking about lending to a family member, friend or acquaintance, conducting the transaction through Virgin Money can provide some much-needed security. It’s even possible that lending money to a friend in need could be more profitable than putting the same money into other investments.
The average return on certificates of deposit (CDs) is 4.33 percent for one-year CDs and 4.31 percent for five-year CDs, according to BankRate.com. 10-year Treasury Bonds are yielding 4.4 percent, according to CNN Money. In contrast, the average rate for a mortgage loan between family members through Virgin Money is 5.25 percent, with rates between non-family members averaging 7.5 percent, according to Watt. The rates for business and personal loans are in a range similar to the 5.25 percent and 7.5 percent rates for mortgages between family members and between non-family members, respectively, Watt said. Even at the lower family loan amount, the rate is still almost a full percentage point above the average rate for CDs.
And, with the added security Virgin Money offers, lenders can feel good about helping out a family member, friend or acquaintance while also feeling that their investment is safer than it would be if sealed by only a handshake. The default rate for loans through Virgin Money is approximately 5 percent, while the default rate on mortgages is between 0.5 and 1 percent, according to Watt.
“Our mortgages tend to be comparable to long-term fixed rate mortgages, as opposed to short term (ARM) mortgages,” Watt said.
Of course, though Virgin Money can help mitigate the stress caused by lending, there is still the possibility that the deal could go sour. Deciding what to do in the event the loan goes into default is up to the lender.
“It’s up to the lender…how they want to enforce the promissory note, which will have the clauses in it about default,” Watt said. “If they want us to go ahead and proceed with collections, we are able to work with a partner to send out a series of collection notices on behalf of the lender.”
When dealing with friends or family, lenders may feel reluctant to proceed with collections, but Virgin Money can work with both borrower and lender to restructure the loan so that it gets repaid.
Those interested in managing private loans through Virgin Money can contact them by phone or through their website. There may be special deals available for investors who choose to manage multiple loans, according to Watt. The company is also looking to expand their business loan offering into multiple products for business investors, Watt said.