Are you thinking about loaning money to your kids or grandkids? An aging parent? Or maybe to a friend or other family member? While the intent is to help, remember that mixing love and money can easily become a difficult situation if either party fails to meet the other’s expectations. Many such loans end up damaging relationships and straining finances if the borrower is unable to or refuses to repay.
Surprisingly, people are far more likely to get in a legal dispute with a former loved one than a stranger. That is why my grandfather advised me to just give what you can to loved ones and let them borrow money elsewhere.
Being an attorney, I’ve learned that the best practice is to document and loan money in the same way a bank would. This practice not only protects you, but it also can be a valuable and practical life lesson for your children or grandchildren.
Before making a financial commitment:
- Do your homework. Before loaning to a friend or family member, schedule a meeting with them. During the meeting, ask key questions about their income and assets, just like a loan officer at a bank or car dealer would. For example, What is your collateral? What is your financial position? How much can you repay and when can you repay it? In fact, pulling out a copy of the last loan you took and utilizing those questions is a very good idea. Not only will you get better insight into their capabilities to repay, but they will learn about how the loan process works.
- Communicate clearly and document. Setting clear expectations in writing before loaning money greatly improves the likelihood that your loved one will repay as expected. Take the time to write down all the details of the loan i.e. amount, collateral, and repayment schedule. For car loans – complete the back of the deed. To have legal recourse, your best option is to hire a lawyer to draft:
- A promissory note.
- A Deed to Secure (which you should in the Deed records to establish your priority against creditors or their heirs if debtor passes.)
- Take a Car Title to Tax Commissioner and put your name on the vehicle to protect your priority as a creditor.
- Set and follow a procedure for collection of payment.
- Email an invoice promptly at least one week prior to the scheduled due date.
- If desired, give incentives for paying early and penalties for late payments. This system rewards loved ones for doing well and penalizes them for not doing well, just like a bank loan.
If your loved one does not meet obligations:
- If they miss a payment or are late, immediately schedule another meeting and discuss the situation.
- Ask questions to determine the cause of the issues and if needed, offer to adjust payment and schedule as needed.
- If their finances have drastically changed, offer to settle the debt for a reduced price. They get the satisfaction of settling the debt and you at least get something.
- Document the meeting and agreed upon changes.
If you own a business or have other debts to collect, be sure to read my next article: How to Collect a Debt.
P. S. I hope this article is helpful and interesting to you. Please leave a comment below and let me know if you found it helpful or if there are other topics you’d like to see articles about.
