Private Money Loans in Nevada: What to Know Before Lending

Loaning someone money is a little like gambling, you should never bet more than you can afford to lose. Also analogous to gambling, there are some steps you can take to lessen the risks. This blog is not geared towards financial institutions or professional money lenders who are subject to a complex set of laws and regulations, this blog is meant to help private persons loaning small or large amounts of money to another person or business.

To loan or not to loan? Understanding the Risks

First and foremost, before you loan anyone money, have a plan for what happens if they are unable or unwilling to pay it back. Never loan more money than you can afford to lose and always plan for the “what ifs”. Calculate the risks, is the benefit of making the loan worth the risk of loss of the principal?

Should You Loan Money to Friends or Family?

If loaning money to a friend or family member, is it worth risking the relationship if they aren’t able to pay you back? If you cannot afford to lose the money, or the financial and personal risks are too great, don’t do the loan.

Get it in writing:

Assuming you decide that the benefits of making the loan are worth the risks, or you want to make the loan for other personal reasons, the next step you should take is to get the details set and put everything in writing!

Why Text Messages and Verbal Agreements Aren’t Enough

Text messages, emails and verbal conversations are great, but they are very difficult to enforce in court. So, if you are making a loan, put it in a clear written agreement signed by both parties.

Loan Agreements Are Contracts

A loan agreement is really just a specific type of contract. A contract is usually defined as a legally binding agreement between two or more parties creating mutually enforceable obligations, generally involving an offer, acceptance, and consideration (the thing of value being exchanged). Contracts establish specific duties for each party, and if there is a breach of the contract, the wronged party can pursue damages against the breaching party. In a perfect world, the contract acts as a rulebook for what people are supposed to do in a particular agreement, and what happens if they don’t. In a contract everyone’s expectations should be clear, understood, and agreed to; the contract serves as a record of those agreements.

Negotiating Loan Terms Before Signing

When making a loan agreement, be sure to get all of the terms agreed to before you commit them to writing. Negotiations are where deal terms are made, contracts are where they are confirmed. For example, if you are loaning someone money, and you intend to charge interest, make sure that is clear and the rate is agreed upon before presenting them with the loan agreement.

Should You Use a Promissory Note?

Although loan agreements can take many forms, a simple promissory note, is a great way to record a loans terms and conditions. A promissory note is a contract for the loan of money with specific terms and conditions, such as the rate of interest, the deadline to repay, or a payment schedule.

Secured vs. Unsecured Promissory Notes

A promissory note can be unsecured, or may take a security interest in certain collateral of the borrower in favor of the lender. If you are agreeing to take a security interest in the borrower’s collateral, make sure to execute a separate security agreement for the specific collateral. For example, if loaning money to a business and you want to take a security interest in their inventory or bank accounts, be specific.

Is Notarization Required in Nevada?

It is not a requirement, but having the final documents notarized is always a good idea.

What Happens If the Borrower Doesn’t Pay You Back?

If the borrower is unable or unwilling to pay you back the money, the law considers that a breach of the agreement; this is the part where the written agreement becomes very important.

Breach of Contract and Cure Periods

For example, your promissory note may have a cure period (usually 10-30 days to cure the breach). Maybe your contract doesn’t provide for a cure period, or perhaps it has an acceleration clause making the entire loan become due immediately; ultimately the terms of your loan agreement will dictate what happens when a breach occurs. If the other party breaches the agreement, the venue to resolve the dispute is usually in the courtroom. Your contract should call for a specific venue and jurisdiction, but if it doesn’t you can file in a court with jurisdiction to hear such disputes and jurisdiction over the parties themselves.

Court, Arbitration, or Mediation

Your agreement might have an alternative dispute resolution (“ADR”) clause demanding that the parties go through mediation or arbitration through a third-party neutral such as JAMS or AAA arbitration. Make sure you understand the dispute resolution portions of your loan agreement before you sign it.

Enforcing a Judgment in Nevada

If you are eventually able to secure a judgement against the defaulting lender, your next step will be to try and enforce the judgment against their eligible assets. Unfortunately, the process is usually painful, time consuming and expensive. You could also consider negotiating for a confession of judgment in the case of a breach of the promissory note. Confessions of judgement are very powerful tools to use when trying to enforce a loan agreement.

Additional Legal Considerations for Private Money Loans in Nevada

It should go without saying, but a contract must be for a legal purpose. You cannot loan money to someone to do something illegal then expect to be paid back. Also, for a contract to be enforceable it must be reasonable.

Interest Rates and Enforceability

Do not charge an unreasonable interest rate, Nevada allows parties to define their rates in contracts, but you would be well advised to stick to something reasonable and conscionable.

Also, check to see if there are any specific laws or regulations you need to be aware of for your particular loan.

Loans to Regulated Businesses (Including Cannabis)

For example, if you are loaning money to a business that holds a privileged license, such as a cannabis establishment, make sure you understand the requirements for taking a security interest against the businesses’ assets before you make the loan. You cannot take a security interest in cannabis inventory, but you could take a security interest in the business or its equipment, subject to approval by the Nevada Cannabis Compliance Board.

Why You Should Have a Nevada Attorney Review Your Loan Documents

Although loaning money to individuals and businesses can earn you a decent return on your money, before you make that loan, be sure to understand the risks and get everything in writing before money changes hands. If the other party breaches, you are left with little choice but to go to court to try and get your money back. Having an experienced attorney prepare, or at least review, your loan agreements before you sign them is a good idea. Although artificial intelligence has come a long way, and it is becoming increasingly popular to pull a contract off of the internet using AI, beware that there are risks using an unproven document that was not prepared or reviewed by an experienced attorney licensed to practice law in the jurisdiction where the contract is to be enforced.

Happy lending.

Thinking about making a private loan in Nevada?
Before money changes hands, have an experienced Nevada attorney draft or review your loan agreement to protect your investment. Contact Connor & Connor PLLC