It turns on whether you are willing to carry a debt. A partial sale leaves you owing nothing and passes the risk on the payments you sold to the buyer. A loan keeps the whole note in your name, and you owe the lender whatever your payer does.
The two arrangements
In a partial sale you sell a set number of your future payments for a lump sum. The buyer collects those payments, and once they have them the note comes back to you.
Borrowing against the note means pledging it as collateral, which is property a lender can claim if you do not repay. The lender advances you money and you repay it with interest. This is sometimes called hypothecation of a note.
Putting the cost on one footing
Both options charge you for money under different names. In a partial the charge is the discount: the buyer pays less than the payments add up to, and the size of that gap comes from their yield. In a loan the charge is the interest rate plus any fees for setting it up. To compare them:
- Ask the partial buyer what yield they used.
- Ask the lender for the interest rate and every fee, then for the total cost over the life of the loan.
- Compare the cash you would hold on day one, after all costs, under each.
- Compare what you would have received in total by the time the note is fully yours again.
We arrange sales and do not make loans, so we can supply only one side of this comparison. For that side, send us your note details and ask for the cash a partial would raise and the yield behind it.
Beyond the cost
| Partial sale | Loan against the note | |
|---|---|---|
| New debt for you | No | Yes |
| Who receives the payer’s payments | The buyer, for the block they bought | You, or the lender on your behalf, depending on the terms |
| If the payer stops paying | The buyer bears the loss on what they bought, unless your agreement has recourse | You still owe the loan |
| What the other side looks at | Mainly the payer and the property | The note, and possibly your own credit and finances |
| If the note pays off early | The payoff is divided under the agreement | The loan is repaid from the payoff and the rest is yours |
Recourse means a duty on you to cover the buyer’s loss, and a partial that carries it sits closer to the loan column, which is why whether a partial is a loan depends on the agreement and not on its title.
Who borrowing suits
A loan fits when you need the money for a short time and expect to repay it soon from another source, and when you have other income to cover the repayments if your payer misses a month. It also needs a lender willing to take a single private note as collateral. Not every bank will, so ask before you plan around it.
Who a partial suits
A partial fits when you want no debt, no repayment schedule and no review of your own credit, when you need a specific sum and can go without the note’s income for a few years, and when you would prefer the buyer to carry the risk on the payments sold. Size it to the need by working back from the amount you need to the number of payments to sell.
Keeping the note untouched
If the cash need can wait or can be met another way, leaving the note alone pays you the most in total, because a partial and a loan both cost something, so settle whether to sell your note or keep it before you compare the two. Tax treatment can also differ between a sale and a loan and depends on your situation, so check with a CPA before choosing on that basis.
Taking the numbers to a lender
Once you have a partial figure, put it beside the lender’s rate, fees and total cost and work through the steps above. A lender who has given you a rate but no total cost in dollars has not yet given you enough to compare, so ask again before you sign either agreement.
Related questions
Is it cheaper to borrow against my note than to sell a partial?
It depends on the lender's rate and fees against the buyer's yield, and on how long you need the money. Get both sets of numbers and compare the cash you keep and the total you receive.
What happens to a loan against my note if my payer stops paying?
You still owe the lender. The loan is your debt, and the lender may be able to claim the note if you do not repay. Read the loan terms and ask an attorney about your exposure.
Does Note Brokering lend against notes?
No. We arrange full and partial sales of notes. If you are weighing a loan, we can give you the partial numbers to set beside your lender's terms.