How to Loan Money to a Friend
When it comes to money and friends, many people will tell you that the two do not mix. This is one of the most truthful things anybody can say because if you ask anybody who has tried to mix the two, the majority of people will say that it only caused problems between them and their friends eventually.
One of the most common reasons that friends stop being friends is because of money. The same could be true about family, but it's even more true when it comes to friends because often times family members will feel more obligated to pay back a loan or to make things right. Friends can often feel less obligation when it comes to these things because they don't always value friendships as much as people value family.
But loaning a friend money and them not paying it back is not the only way that money can cause problems. Sometimes not loaning money to a friend can also cause problems, because many people will say "what's the point of having friends if you can't trust them or help them out when they need help?"
So it's a very complicated situation and it seems that either way, no matter what choice you make, there's always a risk of a friendship falling apart when money becomes involved in it.
So let's say you're willing to take the risk and want to help out a friend who needs a loan? How do you ensure that they pay you back so that you yourself don't suffer from financial hardship as a result and so that the friendship can stay strong?
The truth is there's really no way to completely ensure they pay you back, but there are a few steps you can take to try to help minimize the chances of them ripping you off. So here's just a few guidelines you should go by when you loan money to a friend, but just remember that none of these methods completely eliminate the risk of them ripping you off and you are always taking a chance of that happening when loaning money to anybody.
Evaluate Your Friend
When you loan money to a friend, you need to treat the situation like a business deal. You don't need to profit off your friend like a bank or credit union would, but you should at least treat the situation like it's serious from the very start.
Be as professional as you can and view your friend as a borrower and view yourself in the same way that you'd view a bank. This means that you should evaluate your friend and assess whether they will be able to pay back the loan.
This doesn't mean that you need to run a credit check on them or ask for references the way a bank would. But you should at least try to learn more about their current situation and try to figure out how capable they will be of paying back the loan within the near future.
Ask yourself valid and realistic questions such as "Does this friend of mine have a drug problem?" or "Has this friend ripped off others in the past?"
The last thing you should do is loan money to an unemployed friend who has a drug problem and a history of not paying back their debts. You should also look at their ability to pay and what assets they have in case they default on your loan (in case they don't pay you back). Try to predict the future before it happens to protect yourself in the event that they do actually rip you off.
I've personally loaned money to "friends" who later turned out to be the opposite of that. Some lived in other states, which made it hard for me to go after the money they owed me, while others didn't own anything and didn't work so they had nothing I could sue them for.
These are the questions creditors ask when loaning money to people, so why shouldn't you? It's the smart thing to do.
Create a Contract
Whenever possible, get a contract (preferably in writing). This step alone can cause problems between friends because then one person may get offended that the other doesn't trust them. It can create awkwardness in a friendship and some people will even use it as justification to rip the other person off.
But remember that as the borrower, it's your job to keep things professional and you need to explain to your friend how personal feelings have nothing to do with business in situations like this. You have to stand your ground and insist on having an agreement on paper, regardless of what they will think about you.
Without a contract, you'll have no proof that you loaned any money to your friend. A written contract is best because there will be no debate in court if you decide to sue them later in small claims court. To create one, you simply describe the nature of the loan on paper and the exact amount that is being borrowed. Then, both the borrower and loaner sign the paper.
Oral contracts are the most common type between friends who loan or borrow money, but without any valid witnesses to testify it's hard for a judge to see who is lying and who is telling the truth. Oral contracts are pretty much useless if one person decides to lie and tells the judge that there never was an oral contract or agreement.
However, even with a written contracts there's usually a statute of limitations. This is the time period that a person has to take legal action if the other person defaults. You don't have forever to sue in most situations, and after the statute of limitations is up, you won't be able to take the other person to court if they choose not to pay you.
The statute of limitations and the conditions of it depends on what state or country you live in. It varies from place to place, but it's typically more than a few years for written contracts.
Get it Notarized
If you do decide to create a written contract, it's best to have it notarized, especially if it's a large amount of money. Having something notarized means that you're signing something in front of an official witness whose word is respected in a court of law.
In order to do this, both parties who are signing the contract need to visit a notary to have their signatures witnessed. After each party signs the form, the notary official stamps and signs it to prove that they in fact saw the signing of the contract before their very own eyes.
So if your friend does decide to rip you off, you can show the judge the notary seal and signature and this proves that it was your friend who actually signed the paper.
Some people who default and try to rip others off have no problem with lying to judges as well, so this a way to prove that you did not forge their signature and that it truly is theirs.
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