Thursday, July 31, 2008

Opportunity Knocks And I Answer

The other day, I was sitting at my desk talking with a couple of my coworkers when one started talking about his credit score and how it had dropped about 40 points recently. This guy subscribes to a credit monitoring service and keeps a close eye on both his credit score and credit report. It turns out, his score dropped because of a motorcycle loan he recently took out to get a new motorcycle. He got a special low rate, but must not have read all the fine print because the loan showed up on his credit report as an unsecured loan, i.e. a credit card. Now, the motorcycle company still has the title and they are listed as a lienholder on the registration, so this is really a secured loan, yet it is being reported as unsecured.

So this dropped his credit score because it looks like he now has a maxed out credit card. We were discussing how we could get this corrected. We both agreed it would be a hard task. Chances are, if he called the customer service number for his loan, he'd get someone who didn't even know the difference between a secured and unsecured loan, let alone how they are reported to credit agencies, etc. So it looked like an uphill battle to get this changed. (I should point out that he is planning on purchasing his first house soon, which is why he wants his credit score to be as high as possible.)

After thinking about it for a few minutes, I realized I could help him. I could put on my hard money lender hat and lend him the money to pay off the loan. He could then make sure the lender reported it as closed and it would not be included in calculating his credit score. He would continue making monthly payments to me. I would not report the loan to any credit agencies (unless, of course, he defaults). I offered him the same terms as his current loan: 3 years, 7.9% APR. I also charged a 1 point origination fee. He accepted the deal and today we drew up the paperwork and signed everything. I've now got another hard money loan going, my fourth one overall. I get more passive income at a higher interest rate than a bank would pay and he gets a higher credit score. Everyone wins! And, to return to something I wrote about three years ago, the point I charged means I created money from nothing again!

I should point out the obvious: I trust this guy, I know he has a steady, stable job that he has been at for several years, I know the approximate value of the motorcycle, etc. I wouldn't normally make a hard money loan with the collateral being a depreciating asset like a vehicle.


Andres said...

Just to be on the safe side, keep the title (i.e. just be the new lender) so if something goes wrong (or even better, WHEN something goes wrong) there is an asset to back you up.

Anonymous said...

becareful, if this coworker is a friend it could be a rough situation if he decides not to pay.

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