Everyday stingy: Should you lend money to family and friends? Read this first | Family
Over the years, I’ve heard of dozens of readers who have loaned money to friends and family, only to be outraged when things go sour. The problem is that they write to me after making the loan. To this day, they have been waiting months, if not years, for reimbursement with no success, hoping that I can wave a magic wand to get their money back.
I tell these readers that I wish they had written to me before lending the money. Getting it right from the start makes all the difference in the end. Here’s how:
Only lend the amount of money you can afford to give as a gift. Don’t tell this to your potential borrower, but know in your heart that if you just hand over the money, the chances of being repaid in full are pretty slim. It’s a reality. There’s a reason this borrower is looking to you and not a bank, conventional lender, or credit card to borrow money.
It is a legally binding document that, when signed by both parties, creates a contract. A promissory note sets out the details of the repayment, including the total amount to be repaid, due dates, and penalties if the terms and conditions are not met. It sets the stage for you, the lender, to express your expectations. It makes the borrower aware of these expectations and puts this arrangement on a commercial level with a tone of legality.
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Search “free promissory note” online to find a form you can simply print out and fill in the blanks. Find Word and PDF templates; eForms.com promissory note templates are a good option.
It’s good for you and the borrower that you charge a fair interest rate. If your borrower balks at being charged interest, blame the IRS, which says you, the lender, will be assumed to have earned an interest rate at least as high as the applicable federal IRS rate, which is fixed monthly. As of this writing, this rate is 1.30% and changes monthly.
You can require your borrower to “secure” this loan by pledging something of value they own that has a perceived value to the borrower of at least the loan amount. It could be a Nintendo Switch, a watch, a phone, or a TV. Either way, take ownership. Hold it instead of refund.
Include the fact of this security in your documentation with a clear statement that once the loan is repaid, the security reverts to the borrower. And if the borrower defaults, the collateral becomes yours at your discretion, to be liquidated for repayment of the loan.
Because you don’t want to become a debt collector and hunter of deadbeats, agree a repayment plan in advance before releasing the money to your borrower. Do it while everyone is friendly and concerned about making it work. Let the borrower come up with a plan you can sign up for.
A good idea is for the borrower to arrange direct debits from their bank account to yours. Now you won’t have to wonder if the check is in the mail or if you’ll need to make another awkward phone call.
Well, of course there are! These days, isn’t there an app for just about everything?
Zirtue is a free mobile application (available on the Apple App Store and Google Play) and is perfect for this type of transaction. Zirtue is a relationship-based mobile lending platform that lets you lend and borrow money securely with friends and family. It’s perfect for relationships of trust – people who want to help each other, not take advantage of each other.
Zirtue allows you to set up a formal refund situation. The borrower pays you 5% interest on the loan and makes the automatic monthly payments you have agreed to from their bank account, directly into yours. You, the lender, pay no fees. However, the borrower has to pay a small monthly fee. And isn’t that true? The borrower must learn how the real world works! Borrowing money is not free. A formal loan situation between the two of you will be good for both of you.
Consult Zirtue before making your decision to lend money to that friend or relative. Knowing how it works in advance will help you make a good decision on whether to go ahead with this loan.
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