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Loans Are For Banks

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How many of you have heard of a horror story where a friend lent another friend or family member a significant sum of money (we’re not talking lunch money) with verbal payment agreements (or even written, it hardly matters 99% of the time) that turned sour? It’s those people you see on People’s Court or Judge Judy where a happy agreement made on a bright sunny day turned into a miserable treaty signed under gunpoint. As the lender, you feel guilty trying to collect but the money is rightfully yours. The borrower may have hit a rough patch in his or her life and needs a little extra time. The borrower may truly be a deadbeat, who simply looks like they’ve hit a rough patch, and wants more time. Whatever the case… it’s a bad situation.

Though, if you really feel like you want to do it, legally you need a written contract or agreement of some kind that spells out the particulars of the agreement so that you have a leg to stand on if push comes to shove. For some tips, this website spelling out some basics of contract law may prove handy. Verbal contracts are ugly and when it comes down to it, it’s a he-said she-said situation as to the amount, the terms, etc. If they want the money, they have to agree to the terms. It’s business.

My rule of thumb is if you can’t afford to lose the money or the relationship, don’t lend out the cash. Things always look great when the weather is sunny…

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5 Responses to “Loans Are For Banks”

  1. Neo says:

    There is another aspect to consider. I have a family member that took a large loan from their inlaws in order to purchase their first home. That was a huge mistake since the inlaws never really let them live it down.

    Neo

  2. FMF says:

    If we have a family member who needs a small “loan”, we just decide if it’s reasonable and if so, we give them the money as a gift.

  3. Bruce says:

    I avoid lending money, even lunch money. If I have a friend with whom I eat lunch regularly, it is easier to simply alternate paying than to “spot him”. However, with family it gets more complex. I do it this way.

    1) I have to be able to afford it without pain.
    2) They must really appear to need it.
    3) I give them the money as a loan, while mentally marking it as a gift.
    4) If they pay me back, I may be willing to do it again in the future
    5) If not, then they just used their one-time emergency fund from Bruce.

  4. Carnival of the Capitalists for December 26, 2005

  5. Excellent advice (from you and the commenters). I’ve been on both sides of the “families and friends” loans, and they both stink. From now on, I either avoid it like the plague or just make a gift of the money with a suggestion if that if they feel the need to pay it back, just make a contribution to charity.


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