Think Twice Before You Lend Money

“Before borrowing money from a friend, decide which you need more.”  A. Hallock

Desperate times call for desperate measures and borrowing money can be one of those measures. Most people do not like to be in the position of asking a friend or family member for a loan, but in these economy-challenged times, the prospect of making a loan looms as a possibility due to shortage of funds. Banks are now reluctant to make loans and many families are experiencing job loss or foreclosures. To meet monetary responsibilities, some may look to their families or friends to ‘make a loan’.

It has been said that if you decide to lend money to family or friends for whatever reason, to treat such a loan as a gift. Part of your decision to lend it, should carry the mentality that many people will simply not repay you. It is fair to assume that everyone reading this has borrowed some amount of money to a friend or relative, and never been repaid. Sometimes it’s a ten dollar amount and sometimes it is in the thousands.

It has also been said that all loans to relatives should be considered that it is indeed a gift. Since it is a close relationship and you may be aware of the personal circumstances surrounding the request for a loan, the relative may find relief in that it is money that does not have to be paid back quickly because you know what a bind they are in and will have patience until they ‘get on their feet’ to pay you back. It the repayment is put on the ‘back burner’ of the recipient for a long period of time, they may either ‘forget’ about the loan or simply feel that since it is in the family, it need not be paid back soon….. or ever.

It’s difficult to refuse to help a relative money-wise when times are going rough for them. If you prefer not to lend money, perhaps you could offer to help them out in some way — to pay for an expense that is due, or aid them in paying a household expense or other outstanding charges they may have. Again, because of the relationship with family, and also with close friends, it may be uncomfortable to ask them for an IOU [I Owe You] stating the amount and date of the loan.

An IOU is a written statement of a borrower’s obligation to pay back a loan or a debt, but makes no promises on how or when the loan will be repaid. If the IOU has the borrower’s name, signature, address, date, amount stated, it could be considered a contract that could be enforceable by a court of law to be repaid. Note that State laws and statutes of limitations may vary on the conditions to do so. IOUs are not usually notarized, but it wouldn’t hurt if it is a sizeable amount and if something happened to the borrower and you needed to make a claim against his/her estate.

The difference between an IOU and a promissory note is that an IOU only states an amount that is owed to another party. A promissory note states the amount as well as the steps necessary to pay back the debt and the consequences if it is not. It may also be called a loan agreement or personal loan agreement.

A promissory note is a written promise to repay a loan or debt under specific terms. These notes could exist between any relationship consisting of two persons: parent and child, friends, co-workers, etc. This is usually defined by date, and specified series of payments, or simply paid back upon demand. It also verifies the borrower’s obligation to repay a debt [with or without interest].**

** Interest is regulated by the state and there are laws regulating it (Usury is defined as the act of lending money at an unreasonably high interest rate, this rate is defined at the state level. Repayment of loans at a usurious rate makes repayment excessively difficult to impossible for borrowers. This is also called “loan sharking” or “predatory lending”. Ref: UsuryLaw.com)

The note contains the amount of the loan, terms of the loan, the interest rate – if applicable, the payment schedule and the rights and obligations of the lender and borrower. Promissory notes, like IOUs, do not have to be notarized in order to be considered valid. But again, it wouldn’t hurt and could ensure repayment.

Typically, promissory notes are kept by the lender until the amount of money has been paid in full, at which time the payee can request the right to retrieve the promissory note for his or her records along with a written and signed receipt. This should consider the debt paid in full.

Information that should be included in Promissory notes are: Full legal names of both parties, Address to which payment will be sent ;

Interest rate if applicable (see Usury note above); Due dates for payments of both principal and interest; Signatures of both borrower and lender.

Disclaimer: The information contained in this article is provided for informational purposes only and should not be construed as legal advice on any subject matter. The reader should seek and employ qualified legal counsel and not rely on information presented here for any purpose.

There are persons who genuinely honor their obligations and repay their loans. They will keep you up-to-date on their ability to pay amounts and when and how the payments will be made. These persons are very appreciative of the trust you offered and are eternally grateful.

Sadly there are more of the other variety, who make excuses, sometimes end friendships before they repay their debt or simply seem to forget about the loan.  Think it through before you lend.