A friend in need is a friend indeed, or are they? Many people have learned the hard way that lending money to friends can get complicated. Those emotional ties that bind can make it difficult to get your money back. Friendships that date back as far as childhood can be ruined when money gets in the way.
That does not mean you cannot lend money to a friend who needs it. However, you need to be wise about how you do so. Here is some advice to prevent a loan from becoming a friendship ender:
Have a contract
It might sound too formalised, but having a contract takes much of the emotion out of a loan and brings a sense of formality into the arrangement. This gives you a better chance of getting repaid.
When deciding on a contract, discuss a few vital issues with your friend. This includes the loan value, interest charged on repayment (if any), the number of instalments, how much they are, and when they should be paid.
When you are both on the same page, visit Net Lawman, where you can access an impressive library of legal documents, including loan contracts.
Download an agreement and add in the relevant information or make some additional changes to suit your context. The company offers the additional service of having legal experts check your final draft thoroughly to ensure that it covers all the necessary aspects.
Factors to consider
An agreement is all well and good, but what if your friend cannot repay you because they do not have the money? Before deciding to extend a friend a loan, investigate their situation to determine whether you can realistically expect repayment based on your contract.
For example, you must know if they have a stable income and how much it is. Find out about their other financial commitments to ensure that there is room in their budget to pay back your money.
If you are wary about whether you will get your money back when you need it, ask for collateral from your friend. Incorporate that into your agreement, including a clause that allows you to sell collateral to recoup the loan.
Keep records
When you transfer the loan amount, keep proof of the transaction. Alternatively, make your friend sign for the money if you are giving it to them in cash. Thereafter, maintain records of repayments to avoid disputes about the outstanding balance. The optimal procedure would be to have your friend take out a debit order in your favour so that repayments are managed automatically.
If your friend struggles to repay the loan, you could revise and update the contract you signed initially. Declare the first contract’s repayment terms null and void and draw up a new contract that offers extended terms and reduced monthly payments. Ensure that witnesses sign the contract while both of you are present.
When things go wrong
There are risks attached to any loan, and a loan to a friend is no exception. Do not ignore problems with repayments, instead tackle them head-on. You and your friend should have a frank discussion about what is happening and how to proceed. As much as it might be hurtful, you may have to resort to legal action to seek repayment.
If you are worried that a loan could harm a friendship, it might be better to say no. However, this has the same risk as you might lose your friend because you were not there when they needed your help. It is a fine line, and only you can know how to deal with it.