Tips to keep lending from causing trouble

This was originally published on Monday, January 20, 2014, in the Pacific Daily News.  Click here to subscribe to the PDN.

Last week a reader asked for advice on loaning money to a friend or family member. Money can cause rifts between family and friends. But if you choose to help in a time of need, here are more tips to help make the loan work:

• Business not pleasure. Ensure they know that this is a business transaction and that it does not reflect the personal relationship you have with one another. Cover yourself by getting the terms of repayment in writing in a promissory note. There are online websites that you can find drafts of promissory notes. Have it notarized to give you legal rights in case the loan defaults. This will also give the borrower a sense of personal accountability. In the promissory note include any legal actions that can be made if the loan is defaulted. If you plan to charge any interest it should also be mentioned in the promissory note. In the promissory note put a clause that specifies what happens if you were to pass away. Who would inherit the loan? If you feel more comfortable, talk to a third party to help you draft and collect the money.

• Collateral payments. If the money borrowed is a large sum, to purchase a car or a home, put yourself as a lien or second mortgage holder. This may entitle you to some equity after the primary lender is paid. Seek an attorney’s help for these matters.

• Reminders. It is OK to send friendly reminders when a payment is late. Try not to fixate on how they spend their money once you have loaned them the money. You have the right to inquire when you will be repaid but not to lecture the borrower on how they spend their money. This will drive a wedge between the both of you and damage your relationship. Have an allotment or a direct payment from the lender’s bank go directly into you bank. This will ease the tension of reminders or missed payments.

• Taxes. If you are loaning more than $10,000, talk to an accountant. If the loan defaults you want to document any and all attempts of collecting the money. You may be eligible for a tax write-off.

If you are asked to co-sign a loan think long and hard before agreeing. Understand that you are agreeing to repay the loan if the primary borrower defaults. You may not be notified of late payments or if the loan is defaulted until a few months later. The status of the loan will show up on your credit report and can damage your credit score. Co-signers are equally responsible to pay the entire principal and interest, regardless of who received the loan proceeds.

As I mentioned before, loaning money to anyone is risky. Be prepared that despite your best efforts you may not get repaid. Many loans become gifts. Try not to let money get between you and the borrower. After all, you must have had a pretty close relationship with the borrower for them to feel comfortable enough to come to you in a time of financial hardship.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

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