How to Earn More on Every Loan – The Power of Dutch Interest

Understanding Dutch vs. Non-Dutch Interest

There’s something I’ve wanted to discuss that I assumed was more widely understood than it actually is. However, it has surfaced repeatedly over the past week or two, and because several people have brought it up, it’s clearly worth addressing. In the private lending industry, there’s a distinction known as Dutch versus non-Dutch interest. I’ve always thought this was common knowledge, yet many lenders—especially newer ones—aren’t familiar with the terminology.

I use this language constantly in conversations, and sometimes people stop me and say they have no idea what I’m referring to. So, it’s important that we walk through it clearly. In private lending, there are essentially two methodologies for calculating interest: Dutch and non-Dutch. The core difference comes down to whether the borrower pays interest on the full loan amount or not. This includes construction holdbacks—even if those funds haven’t been disbursed yet.

The core difference comes down to whether the borrower pays interest on the full loan amount or not.

For example, imagine a $100,000 total loan, with $20,000 as a construction holdback. At closing, the borrower receives $80,000 for the purchase. The remaining $20,000 sits in escrow for future draws. The question becomes:
Are you charging interest on just the $80,000, or on the full $100,000?

This distinction matters because the choice will impact the borrower’s monthly payment. With non-Dutch, the borrower pays interest only on the $80,000 until they draw against the remaining funds. Once they draw $10,000, for instance, their principal for interest calculation becomes $90,000. Naturally, their payment increases, and once the full amount is drawn, they pay interest on the entire $100,000.

Although this seems straightforward, the majority of lenders—including myself—use Dutch interest. The primary reason is practical: if I’m setting capital aside specifically for a borrower, that money needs to remain available. I can’t deploy it elsewhere, and therefore I can’t earn interest on it with another borrower. Because those funds must sit ready in escrow, the borrower pays interest on them, regardless of whether they’ve been drawn.

Interestingly, within the last two weeks, I spoke with four different lenders who either didn’t know what Dutch interest was or didn’t realize it was the standard practice in private lending. Because this topic continues to surface, it clearly deserves attention.

Why Most Private Lenders Use Dutch Interest

I strongly encourage private lenders to adopt Dutch interest because it simplifies operations and reflects how capital is actually allocated. In platforms like Lendr, you can choose either method, and the system will handle calculations automatically. However, Dutch interest aligns more closely with how private capital functions.

Most borrowers don’t know or care about the difference. If you tell them the loan is $100,000 and the monthly payment is $1,000, they often accept that without question. Yet more experienced borrowers—those who have been through several projects—may understand that non-Dutch would lead to lower initial payments. They might ask if you offer that option.

Traditional banks, credit unions, and institutional lenders typically use non-Dutch structures. When someone builds a new home through a bank, their principal balance begins at $0, then increases as the foundation, framing, electrical work, and other construction phases are completed. Their payment rises in tandem. Borrowers who have dealt with banks often assume private lending works the same way, which contributes to the confusion.

Another major advantage of Dutch interest is the additional yield you earn. Returning to the $100,000 example—with $20,000 held back—those funds sit in my trust account until the borrower requests a draw. While they sit there, I’m earning 14% interest from the borrower. On top of that, my trust account is a high-yield savings account, currently around 3.5%. Although the amount decreases as the borrower draws funds, that additional yield accumulates meaningfully across multiple loans.

Although the amount decreases as the borrower draws funds, that additional yield accumulates meaningfully across multiple loans.

To illustrate, we recently funded a ground-up construction project for a barndominium. It was a $350,000 loan, and the entire amount sat in escrow and increased over time with each draw. Instead of just $20,000 being held, the full $350,000 sat ready. Once you have several loans with construction holdbacks running simultaneously, these additional returns become substantial.

At times, savvy borrowers push back and prefer to avoid paying interest on undisbursed funds. When this happens, I explain that we are a private lender, meaning our capital comes from private investors, not institutions. I still owe those investors their returns. So, Dutch interest compensates for tying up that capital. Additionally, borrowers typically begin taking draws quickly. A $20,000 holdback might shrink to $10,000 within six weeks and then to $0 six weeks after that. Ultimately, the borrower may pay only a small premium—maybe $1,000—for the convenience, speed, and reduced underwriting hurdles that private lending provides.

Borrowers usually accept this explanation, especially when they realize how minor the difference is over the life of the loan. We receive more pushback on interest rates and points than on Dutch versus non-Dutch calculations. For lenders who’ve never adopted Dutch interest or who have relied on borrower-friendly methods, shifting to Dutch may feel like a significant change. Yet, as I’ve seen across our platform, the overwhelming majority of lenders use Dutch, and it remains the industry standard.

Lessons Learned and Shifting Lending Practices

Some lenders insist that their borrowers “won’t go for” Dutch interest. I disagree. Perhaps your current borrowers resist it, but that doesn’t mean new borrowers will. We often stick to our routines—myself included—and assume that the way we’ve always done things is the way we should keep doing them.

Perhaps your current borrowers resist it, but that doesn’t mean new borrowers will.

I had a similar experience with monthly interest payments. When I transitioned from flipping to lending, I carried my borrower mindset with me. I loved not making monthly payments when I was flipping, so I deferred interest when I began lending. Borrowers didn’t have to make monthly payments; everything was due at the end. I figured this made loans easier to manage and friendlier for borrowers.

Now, after gaining more experience, I feel the opposite. I firmly believe that money now is far better than money later, and monthly payments create discipline. If I could go back in time, I’d immediately correct that earlier decision. When you’re the lender, you set the rules. You don’t need to negotiate endlessly with borrowers. If you want to change terms, simply notify your borrowers and give them a reasonable transition period—perhaps six months—and explain that new loans originated after a certain date will follow your updated structure.

Borrowers may not love these changes, yet they almost always understand. You can frame it around obligations to your investors and the long-term sustainability of your lending business. In our experience, we’ve lost very few borrowers due to changes in payment structure or interest methodology. At most, I can recall a single borrower who didn’t continue working with us because of these updates.

If you’re just getting started in private lending, adopting Dutch interest from the outset is the best path. It sets the precedent early and avoids future complications. Borrowers learn your system from day one, and you earn the returns necessary to run a healthy lending operation.

Practical Encouragement

I hope this discussion clarifies the difference between Dutch and non-Dutch interest and explains why Dutch is so prevalent in the private lending industry. This topic keeps coming up in recent conversations, and despite my assumption that many people understood it, many lenders still find the terminology confusing.

I hope this explains why Dutch is so prevalent in the private lending industry.

The phrasing itself—Dutch vs. non-Dutch—isn’t always intuitive. When people hear it for the first time, they often don’t know what it refers to. However, once you understand the logic behind Dutch interest and see how you manage private capital in the same way, the entire concept becomes much more straightforward.

Charge Dutch interest.
You’ll earn more money.
Your operations will run more smoothly.
And I promise—it’s not intimidating for borrowers once they understand how minimal the impact is.

If anything, using Dutch interest positions you as a professional, consistent lender with a clear process. That consistency attracts serious borrowers and supports more sustainable long-term growth.

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