So You’re Lending Money to a Friend?

A Few Suggestions

There’s an old saying that before lending money to a friend, you should consider which is more important to you, the money or the friend because you’re going to be losing one or the other. Many—if not all—of us have at one time or another either lent to or borrowed money from family or friends. In a tight spot, the money needed to repair a car or pay medical bills often comes from a loved one or good friend. Usually things go fine, friends and family members repay personal loans and life goes happily on. Sometimes the loans don’t get repaid and an attorney (or sometimes two) is called into try and help the now unhappy lender collect from an often now estranged friend or family member. The purpose of this article is hopefully to help family members and friends accurately gauge the risks/returns of personal loans at the outset, have a realistic picture of risks, and set up as much security as possible.

The first thing to consider is that if a family member or friend is requesting a loan from you, they may be unable to secure traditional (i.e. bank) financing. Often because this is because traditional lenders view your family member or friend as a credit risk and have declined to make the loan. This may be because of credit history, a lack of credit, or a lack of security/collateral. In any event, while credit risk should not necessarily dissuade you from lending to family and friends, make sure to go into such arrangements with both eyes open.

The second thing to consider in making a personal loan is how to memorialize your agreement. While oral contracts and promises to repay are usually enforceable, there are a number of limitations, the most important of which is the simple fact that people’s recollections of what was agreed to always changes over time. For this reason, the best rule is to write the agreement down and make sure that everyone signs. If you’re going to do a written agreement, make sure it includes payment amounts, due dates, and interest rates. It may also be helpful to include an amortization schedule with the agreement, which can be easily created and printed from various interest sites.

Finally, you should consider the issue of collateral and security. In other words, if your friend or family member is unable or becomes unwilling to make payments on the loan, do you get to collect anything else to be made whole? A good example of security that we’re all familiar with is house and car loans. If we don’t make the payments, our car is re-possessed or our house is foreclosed on. Unsecured loans are like lines of credit or credit cards, which if you default on, usually do not allow the lender to repossess any property without first filing a lawsuit and getting a judgment. If you include the proper language in your loan agreement with a friend or family member, you can include some form security, which will protect you in the event the friend stops making the required repayments.

Personal loans can be an invaluable way to help a friend or family member in a time of need. One way to ensure that the friendship continues after the loan is paid is to make sure the payment terms are clearly and unambiguously written in a loan agreement and to include security in the loan to protect yourself. A competent attorney can help ensure that your agreement is solid and will protect you to the full extent of the law should payments not be made.

Clifford Gravett is a local attorney with the Virgin Valley law firm of Bingham Snow & Caldwell and serving clients in Nevada, Arizona, and Utah (702-346-7300 / www.binghamsnow.com).

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