At LoanBack we have collected a number of anecdotes from users about personal loan horror stories they experienced before they found LoanBack. Below we have compiled some of the most common stories along with some advice on how to avoid the pitfalls with your loan. The common thread through all these stories is that they could have been avoided if they had found LoanBack earlier.
The Handshake Loan
After college I found a great job in New York and scored a starting bonus of $10,000. I returned to my hometown to prepare for my move to the Big Apple and went out for drinks with my best friend from high school. My buddy had just graduated as well and found a job at a newspaper out of state. He was low on cash, high on student loans and the newspaper job was entry level so it wouldn’t pay very well. I knew that being a reporter was his dream job so I offered to help him out with a loan of $3,000 to help cover his move and set him up in the new town. We never signed anything; I just wrote him a check and told him to send me $130 a month for two years. My cocktail napkin math told me the interest I was charging him was around 10%, which seemed fair to both of us.
Everything went fine for the first couple of months. Then my buddy was a week late with a payment, then 2 weeks, and then he didn’t pay me for a month. I felt really awkward calling him and asking him for the money. When we finally spoke he claimed he had completely forgotten to mail the check. I patiently waited for the check and it never showed up. We rarely spoke for 10 years after that and when we did speak the loan was the elephant in the room. Last year my friend was in town for business and we met for drinks where he finally repaid the principal (without interest). While I am happy we have our friendship back, I wish we had spent some time to put the loan on paper.
Chula Vista, CA
Handshake loans rarely have a happy outcome because neither party will have a clear understanding of their responsibilities. If the loan isn’t properly documented both sides are going to have different recollections of what was agreed upon before the handshake.
If they had used LoanBack, both parties would have signed a legal loan agreement and using the easy loan-building wizard the lender could have decided to ask for some loan security like a car title or valuable piece of personal property. Using LoanBack would also have allowed the parties to set up email alerts to remind everyone of upcoming payments. Finally, the parties could have restructured the loan using LoanBack if the loan was in trouble and both parties were interested in trying to save the loan and the relationship.
The Unsecured Loan
I used to work as the manager at an auto parts warehouse. After the owner lost a couple of key contracts we had to downsize the staff and I ended up laying off one of my buddies. CJ was a smart guy so I was pretty sure he would land on his feet ok. A few months after the layoffs CJ called me and told me he had found a new job that required a long commute. CJ was going to trade in his old car and buy a used Honda Accord for the new job. Unfortunately, CJ had bad credit and couldn’t find financing for the used car. I still felt pretty bad about letting CJ go so I told him I would help him out with a car loan.
We wrote out what we thought was pretty clear description of the loan and how he was going to repay it over the next 12 months. We signed it and made copies. Long story short, CJ made payments for 6 months and then his new company went bankrupt and CJ was out of a job again. I figured he would make good on the loan by selling the car to pay me back, but he had a different idea. CJ refused to sell the car or sign the title over to me so I could sell it and get my money back. I even offered to share the proceeds with him. No dice. I ended up writing off the loan and the friendship, but I still get angry whenever I see a green Honda Civic on the road.
Creating your own loan agreement from scratch isn’t a good idea. When you create your loan agreement, you are bound to leave important terms out. In this case the lender didn’t think to add any collateral to the loan to reduce his risk and give him recourse if the loan went bad. In addition, a homemade loan agreement may not be enforceable in a court of law.
When you create a personal loan using LoanBack, you will be asked a series of simple, straightforward questions about your loan and at the end of the process LoanBack will automatically generate a legal loan agreement for you. LoanBack also makes it super easy to add collateral to your loan agreement.
The Nosy Lender
My dream has always been to own my own restaurant. I worked for years perfecting my craft, learning the business end of restaurants and saving money. I decided to pull the trigger when I found the perfect location. I realized I would need help financing my dream so I put together a business plan and made the rounds of my local banks. All the banks said I didn’t have enough experience and wouldn’t have enough equity invested in the venture. I thought about maxing out my credit cards, but I quickly realized that I couldn’t last long paying 20% annual interest.
I approached my parents to see if they would be interested in investing in my dream. My parents wanted to help me, but they couldn’t afford to loan me all the money so my dad found a golf buddy who was a ‘Foodie’ to lend half the amount. We found a local lawyer and spent $500 drawing up the agreement and I was in business.
Everything was great for the first few months; I was hitting my targets and inching towards profitability. Then the trouble with my dad’s friend started. The Foodie began stopping in for lunch several times a week, sometimes with other friends from the golf club. The first few times I figured it would be nice to comp his meal since he loaned me the money, but he soon came to expect that he and his friends could eat for free. Almost as bad, after every visit he would send me long winded emails suggesting menu changes, critiquing the staff and telling me what I needed to do to make the restaurant successful. Over time the pestering and expectation of free meals became unbearable. I finally had a blow out with him about his behavior. He said he felt he was entitled to continue his behavior because he helped ‘build’ the restaurant. Luckily for me, the restaurant was successful enough that I could accelerate the repayment of his portion of the loan and end our relationship. If I had to do it all over again, I wish I could have figured out a way to make it clear that he was just a lender and didn’t have the right to tell me how to run my business.
The borrower in this case did not take the time to add a covenant to the loan agreement that outlined the responsibilities of the lenders.
When creating your loan its important to think about the worst case scenarios and plan for them. In this case the parties could have inserted a clause in the loan agreement that stated the lenders would not have any involvement in the operation of the business or receive any special discounts. It is easy to include special clauses or covenants to your loan when using the LoanBack wizard to build your loan.
The Wrong Loan for the Wrong Person
A few years ago my brother in law asked me for a loan to help him build a new deck and furnish it with high end BBQ equipment. I have never been a big fan of my brother-in-law, but my wife convinced me that we could trust him to repay the loan. I should have listened to my instincts or at least spent some time thinking about whether my brother really should be spending the money on an expensive addition to his house and Wolf Outdoor Grills. My brother was able to repay about half of the loan before he decided he couldn’t afford the loan payments and asked me to forgive the remaining amount. My wife is still close to him, but I refuse to attend any family event when I know he is going to be there.
This is an example of a personal loan that shouldn’t have been made with the expectation that it would be repaid. The loan simply didn’t make sense. The borrower used the proceeds for a discretionary expense that he couldn’t afford so it didn’t make sense to borrow money to make the purchase.
When you use a service like LoanBack to formalize your personal loan, it gives both parties the time to review the terms and reflect on whether or not the loan makes sense. Formalizing the loan and signing documents will also impress upon the borrower the fact that the loan is not a gift because it is being treated as a traditional loan.
The Reversal of Fortune
A couple of years ago one of my wife’s good friends had a run of bad luck and ended up living off of her credit cards for a time. She approached us and asked if we could help her consolidate her credit card debt with a personal loan. We would lend her money at a reasonable interest rate so she could pay off all her cards with rates from 15% to 22%. She had just returned to work and was willing to pledge some family jewelry as collateral. It seemed like a win-win proposition.
The friend was very conscientious about repaying the loan over the next two years and then I hit a run of bad luck. I lost my job and my wife’s job didn’t pay enough to cover all of our expenses. I know that our borrower had been doing pretty well and had more than enough to repay us so I asked her to accelerate the repayment and cash us out. The borrower thought she had a good interest rate and had no need to repay the loan early. After some torturous conversations and some harsh words between my wife and her friend she finally repaid the loan early with a pretty significant discount in her favor. I really wish we had though this through before making the loan.
The problem in the above example above could have been easily solved if the lender had inserted a demand clause into the loan agreement. A demand clause allows the lender to give the borrower notice that the loan must be repaid in full within a specified time frame (e.g. 30 or 60 days).
If the lender had used a service like LoanBack, they could have easily inserted a demand clause into the loan agreement and specified the amount of notice the borrower had to repay the loan. LoanBack would also have automatically alerted the borrower of the “demand” and calculated the final payment due.
Loans to Friends and Family Ready to Ruin a Friendship? We’ve Got a Loan Contract for You – SmartMoney.com
Loans to Friends and Family Risks and rewards of loans between friends – Bankrate.com