Thursday, September 11, 2014

Protecting yourself when making loans to friends and family

Most everyone wants to be able to help out friends and family when the time comes, but there’s a lot to be said for making sure that your own financial situation isn’t compromised by helping someone else out. Not only that, but making clear the terms of any loan can help avoid situations in which relationships become strained. As we all know well, there isn’t much that comes between friends and family quite as quickly as a fight over money. Since you want to avoid that situation at all costs, look over the following tips to help you navigate the treacherous world of loaning money to friends and family. If you heed the advice to follow, chances are good that you and your family will conclude your business not just amicably, but perhaps on even better footing than you ever were before.

Get organized before you even think about loaning anyone money. Obviously, if you’re spotting someone $20, then it really isn’t much of a big deal. You just have to remember who owes you money. On the other hand, if you’re loaning your sister $1,000 or more, it doesn’t matter how close you are, make it a point to write everything down. It isn’t fun to think about, but the worst-case scenario does come up from time to time, and you have to be prepared for it. Consider if something were to happen to her. As far as creditors go, the credit cards, student loans, mortgage, and a host of other bills are going to be divided up first, with whatever’s left going through probate court, (in the absence of a will,) wherein you’re going to have to prove that you loaned her $1,000. If you don’t have paperwork, and there’s no will or power of attorney (such as is the case with many younger folks,) then you might be out that amount. 

Papers proving the existence of a loan don’t have to be complicated or even particularly detailed, especially when you’re dealing with family. Usually, a promissory note is more than sufficient to prove that money is owed, and if it’s signed by both parties, then it’s pretty much bullet proof in most cases. 

So, what’s a promissory note, you ask? It’s simple. It just states the amount of the loan, the intended repayment terms, any interest that might be due, and, of course, those signatures. It should be dated, and it’s a good idea to make sure that the intended date of full repayment is set here, as well. 

Now, that’s just for family. If you’re loaning money to a friend or a co-worker, you might want to up the ante just a bit so that you’re protected, particularly in case of a default on a relatively large amount of money. How can you protect yourself, you might be wondering, beyond a promissory note? That’s easy. Take a page out of the book that pawn shops follow. Taking and holding personal property against the full payment of a debt is common, so don’t be afraid to ask the person who’s borrowing money from you to produce it. 

So, what’s good collateral for a small loan? Let’s discuss loans that amount to less than $1,000, just for ease of discussion. It isn’t out of line to hold a vehicle title for a $1,000 loan, though more common is jewelry or other personal property. Just about anything that you could sell to cover the debt is fair game, but again, be careful. You’re not going to want to take your best friend’s motorcycle because he couldn’t pay up with a $500 loan. Be courteous, and first of all, be a friend. Only if there’s a breakdown in the repayment should you consider taking possession of something you’ve been holding title for. Then, consider giving your friend fair market value for the item. It’ll help them out if you want the item, and they may still be a friend then to buy the item back off you in the future should you run into some financial trouble yourself!

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