Issues to consider when loaning money to a friend or family member.

At some points in our lives many of us are approached with the request to borrow money from a friend or family member. Most of us want to help others out and feel it unnecessary to consult a lawyer or other professional on the details. The following are some things to consider if you are going to loan money to a friend or family member.

Evaluate whether you can you afford to loan the money. Do you have your needs met? Do you have your emergency funds squared away? If the answer is “no” or “I don’t know,” you may want to take a moment to evaluate whether or not you want to put yourself at risk for another person. Sometimes we need to go out on a limb for a family member, but if you are unable to care for yourself, it will be difficult to help someone who is in need, think of it as being in the middle of an ocean without a lifeboat trying to help someone in the same circumstance.

If you are in a position to loan money, should you put it in writing or not? My advice is to always put it in writing and have a lawyer help you. While many may not agree, I cannot tell you how many times Party A claims the $5,000.00 check given to Part B was a loan and Party B stating the check was a gift. If you are trying to seek recovery, it is your burden of proof to show that the money was a loan and not a gift. A note on the memo line may or may not cut it in some instances. If you are loaning money, put it in writing and make sure the borrower signs the instrument before or at the time the money exchanges hands. Do not allow your feelings to influence you. If you have any expectation of being repaid, memorialize the transaction in writing. Money has no idiosyncratic feeling to return to the original lender. Most people who seek money from a relative or close friend appeal to the relationship with that person. The money has no personal attachment to the lender once it leaves your pocket book or checking account. Many individuals feel they are more likely to be paid back monies loaned to a relative and friend because of mutual respect or feelings. The truth ranges from people falling on hard times to some people thrive on taking advantage of others. Some of the aspects of the loan to put in writing include, but are not limited to the amount borrowed, the time in which to repay the loan, the interest rate, fees and costs associated with the loan and who bears the costs, whether or not there is collateral, what happens if the borrower is unable to pay.

Consider whether you want your attorney to draft up the loan agreement and gather the information you need on your behalf. Any savvy lender will obtain information before reviewing whether or not to lend money to a borrower. Thank about all the information you had to provide your lender when you wanted to buy a car or house or simply open up a credit card account. It should be no different when you loan money to a friend or family member if you expect to be paid back. Gather information you need to collect the loan. In the even of default, do you have the borrowers information needed to collect the debt if you need to seek involuntary collection? If you need to issue a bank or wage garnishment, do you know the borrowers social security number, where they bank and where they work? If you send the matter to collections for a collection agency or attorney to figure out, you will be looking at paying costs and attorney fees out of pocket and/or giving up a percentage of what is collected. If you have the borrowers social security number how will you store it securely to ensure the number is not stolen from you from an identity thief? Will the person you are lending money give you the right information?

How one person handles money is very different from the next. Some are more detached than others, others are better at saving than spending and vice versa. If someone comes to you to borrow money, you are probably a good saver. The person asking to borrow money may be doing so for a more than one reason of reasons. Reasons range from a desire to start a business, cover medical expenses, veterinary bills, to buy a necessity, buy something wanted or to pay off a debt. Whatever the reason may be, recognize it for what it is worth; and realize the reason may be multiple and may be factor in to whether or not you are paid back.

Talk through how that person is going to repay the loan. If your gut tells you the plan the borrower articulates seems unlikely, it probably is. It is a good time to discuss a strategy to come up with the funds. Remember, once the money leaves your hands, do not obsess how the other person spends it or how they live their life, focus on the terms of repayment. Do not get angry if the person suddenly has nice clothes, a new car, a new pet, goes on a vacation, dines out, seeks salon services or other things you deem frivolous. Loaning money should not be used as a means to control someone else’s life. If your purpose of loaning money is to influence how someone behaves you may find yourself sorely disappointed.

Obviously, I am a huge advocate for having an attorney advise you in your own personal lending situation. I do recognize that lawyers can sometimes get in the way of a deal, but we are also here to look out for our clients and avoid problems. Avoiding problems is much more cost effective than fixing messes. Often times we cannot appreciate the fact that a problem was avoided because we would not have known otherwise. If you are a novice at lending money to friends and family, a few hundred dollars upfront to evaluate and draft a promissory note or other lending instrument may not save you from hurt feelings if the repayment fails, but it may make it less stressful and more cost effective to enforce the agreement down the road.

Never loan money you are not willing to give away. No matter how strong the instrument, or whether an attorney helped you draft the documents or obtain the information, the truth is, you may never see the money you loan again. The person may become permanently disabled, refuse to work, file bankruptcy, make themselves insolvent, or pass away before the loan is repaid. If you cannot accept the notion you may never be paid back, or if you cannot afford to not be paid back, do not lend money. You can simply say no and smile. If you are feeling particularly generous, there may be other ways you can offer to help, such as buying a bag of groceries, pay a bill directly or some other service.