Welcome back to our “Start Investing with your Solo 401k” series. In part 2 of our 7 Part Series, we’ll discuss Private Lending.
In case you missed it, click here to read the first installment about using your Solo 401k to invest in Gold & Silver.
Become a Bank with Solo 401k Lending
Making money on lending money can be a lucrative way to build wealth. However, historically if you weren’t a bank you would have been strongly restricted in who and how you can lend funds. For many years, there have been laws that limit the type of investing the common man can participate in. The most lucrative investments were only available to Accredited Investors or banks/corporations.
However, in May of 2016 changes to the JOBS act made it possible for anyone to participate in types of lending previously only available to Accredited Investors or certain corporations. Now, regardless of your net worth, you can participate in private lending and be like a bank.
Private Lending and the Solo 401k
In the past if you needed a loan, you would go to your local bank. There, you’d sit with a banker who would review your assets and collateral. The bank would consider your risk factors and credit score. Then the bank would approve or deny your loan.
Today, if you need a loan you can go online to any number of reputable sites, complete a short application, and get approved in a matter of days. You can shop around online for the best interest rates among different sites from the comfort of your own home. But who is on the other side of these loans? Who is actually lending the money?
With a self-directed Solo 401k plan, your retirement plan can be the bank. This means your Solo 401k can fund private loans to individuals (or businesses) and make money on the interest on top of the loan repayments. Of course, it’s possible to do private loans where you find a third party to lend funds from your Solo 401k plan. Keep in mind if your Solo 401k is lending funds to a private party, they can’t be a disqualified person.
With the proliferation of the Internet, it’s easier than ever to find a pool of borrowers who need your funds, and will pay interest to get access to those loans.
Most private lending websites use crowdfunding to raise money to fund these loans. Once the loan is fully funded, the funds are sent to the borrower who in return, pays the loan back via monthly payments. This enables the borrower to get a lower interest rate than with a bank or with a credit card. Similarly, it opens the opportunity for the lender (investor) to receive a higher rate of return than with traditional assets.
As with any investment, there is inherent risk and you should always carefully research any site you utilize to accomplish your goals. The following are a couple examples of private lending sites where your Solo 401k can establish an account and begin lending.
Prosper allows you to sign up and create a lender account with no initial deposit. Their minimum investment amount is $25. Prosper charges 1% on investment returns. In return for their 1%, they do the “heavy lifting” of screening borrowers. Their duties include:
- Running a credit report
- Verifying annual income of the borrower
- Confirming borrower’s identity
After opening an account, investors can browse available loans. Loan requests include details like:
- Credit score
- Total amount of debt from the borrower
- Available credit
- Loan amount requested
- Borrower’s employment source
.. and more!
After completing his due diligence, the investor determines the loan to invest in, and how much to invest with. Once the loan is fully funded by investors, it’s considered active. Once the loan is active, the investor need only receive his repayments. Prosper does not require accredited investors. However, they only offer services in specific states. While you don’t have to be an accredited investor, Prosper investors must reside in specific states. Your Solo 401k trust can open a Prosper account and fund the account from your Solo 401k funds. Then, simply choose your loan portfolio allocation and risk tolerance and get started in a matter of minutes. This is a great option to consider for your Solo 401k to do some private lending if you are short on time, or don’t have access to a large investor network.
Lending Club also allows your 401k trust to create an account with no initial deposit. Their minimum investment amount is $25. Lending Club also has a fee of 1% of your investment returns. In return, their staff screens potential borrowers, facilitates the lending via their secure website, and services the loan.
One feature that sets Lending Club apart from Prosper is the ability to trade loans. That means that with Lending Club not only can your Solo 401k purchase notes for loan investments, but can also trade notes. In addition to trading notes, your Solo 401k trust can sell notes that you’re invested in, prior to the loan term ending.
Private loans are generally illiquid. However, the ability to sell a note before it is paid off can help make the investment more attractive for those who need liquidity. This means investors can access invested funds in the case of an emergency.
In addition to an easy-to-use investor website and phone app, Lending Club also has a blog with articles covering topics from how to diversify your investments to learning how to stick to a budget. Finally, due to different state laws, Lending Club is also limited as to what state you must reside in to become an investor.
Private lending can be a lucrative and interesting investment. It is uncorrelated to Wall Street, so in the event of a stock market crash, these loans may keep their value, instead of crashing along with the stock market.
DISCLAIMER: At publish time, Nabers Group are not affiliated with any of the sites listed in this article and does not receive incentives for any referrals.
Fantastic blog post! I found your insights on solo 401(k) private lending to be incredibly valuable. It’s fascinating to learn about the potential benefits and risks associated with this investment strategy. Your explanations of how solo 401(k) plans can be utilized for private lending, along with the tax advantages and diversification opportunities, really opened my eyes to new possibilities. I appreciate how you emphasized the importance of due diligence and proper structuring to mitigate risks. Your expertise and guidance make it easier for readers like me to navigate the complexities of private lending within a solo 401(k). Thank you for sharing such valuable information!