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Have you ever thought about loaning money to a friend or helping someone fund a business deal? Or maybe you’re looking for a faster, more flexible way to get financing outside the bank? Private lending can be a helpful option in these situations, but it’s essential to understand how it works. While private lending is legal in Massachusetts, it’s subject to specific rules and risks that both lenders and borrowers should be aware of.
What Is Private Lending?
Private lending is when an individual or non-bank entity loans money to another person or business. These arrangements often happen between family members, friends, investors, or through private lending companies. Unlike bank loans, private loans tend to be more flexible in terms of qualification and move quickly.
In many cases, people turn to private lenders to fund real estate deals, cover short-term expenses, or access money when traditional financing isn’t available. Even if the loan is between private parties, the terms still need to be clearly defined. Without a written agreement and proper legal structure, misunderstandings or disputes can arise quickly.
Is Private Lending Legal in Massachusetts?
Yes, private lending is legal in Massachusetts. But it’s not a free-for-all. There are rules that apply, and ignoring them can lead to serious consequences.
Massachusetts has usury laws that limit the amount of interest that can be charged on a loan. If a loan agreement doesn’t specify a rate, the default legal interest rate is 6% annually. However, lenders can legally charge more—up to 20% per year—if the rate is clearly stated in writing. Charging more than 20% without a proper license may trigger criminal penalties and make the loan unenforceable. The law does include a few exceptions. Higher rates may be allowed for certain small loans, open-end credit accounts (like credit cards), and loans secured by a life insurance policy. In addition, many national banks are exempt from state usury limits because they are regulated under federal banking laws.
If you’re making loans regularly or as part of a business, you may also be required to obtain a lending license. One-time loans between friends or family usually don’t require licensing, but if you’re lending for profit or as an investment, it’s a good idea to talk to an attorney about the legal requirements.
What Are the Key Legal Requirements?
To keep your private lending transaction legal and enforceable, you’ll need to follow some important guidelines.
Interest Rate Limits
Without a license, the annual interest rate on a private loan can’t exceed 20%. Charging more than that without being licensed may not only void the loan but also expose you to legal penalties.
Licensing Rules
Lending as a one-time favor doesn’t usually trigger licensing requirements. However, if you lend to multiple people or through an investment group, the state may view you as a commercial lender. In that case, you’ll need to apply for a license through the Division of Banks.
Written Agreements
Every private loan should include a written contract which should clearly state the loan amount, interest rate, repayment terms, due dates, and what happens if there’s a default. Verbal agreements are difficult to prove and rarely hold up in court.
Common Risks for Private Lenders and Borrowers
Private loans carry risks on both sides, and many of those risks come from skipping legal steps.
For lenders:
- If the interest rate is too high or the agreement is vague, you may not be able to collect the money.
- You might also face tax or regulatory issues if the loan is considered a business activity.
For borrowers:
- You could agree to unfair terms without realizing it.
- There may be confusion about repayment, late fees, or collateral if nothing is written down.
When loans are made between friends or family, emotions can complicate matters. A clear, legally sound agreement helps protect relationships and keeps everyone on the same page.
How We Can Help
At LaFountain & Wollman, P.C., we help individuals and businesses structure private loans with confidence. Whether you’re thinking about loaning money, borrowing it, or using private funds to invest in real estate, we’ll guide you through the legal steps.
Our attorneys can:
- Draft or review loan agreements
- Advise on interest limits and licensing
- Ensure your loan is enforceable and compliant with Massachusetts law
We’ll also answer your questions about risk, liability, and how to resolve disputes if something goes wrong.
Talk to a Massachusetts Attorney Before You Lend or Borrow
Private lending can be a smart solution, but only when it’s done with care. Before you lend or borrow money, talk to a legal professional who can help you do it the right way. At LaFountain & Wollman, P.C., we’re here to help you protect your money, your rights, and your peace of mind. Contact us today to schedule a consultation.