Personal Loans: How to Protect Yourself on 02/16/2011

Print This Post Print This Post |     |

A personal loan can be a risky venture if it is not properly set up. When a personal loan goes bad, usually the personal relationship that underlies the loan also becomes a casualty. There are a handful of simple steps that both parties can take when setting up their loan that will protect the interests of both sides and help ensure the success of their loan.

The first step is to formalize the loan by clearly incorporating all the key loan terms and repayment schedule in a loan agreement. If you choose LoanBack, you will be asked a series of simple questions about your loan terms and then a legal loan agreement and repayment schedule will be automatically generated for you. A clear and complete loan agreement is critical so that both parties understand their responsibilities under the loan.

In a personal loan, both parties are risking their relationship, but the lender obviously has more at risk given their investment. Lenders have several options to help mitigate the risk of their loan. First of all, the lender should make sure they are making a sensible loan, setting the loan amount and interest based on the borrower’s ability to repay the loan. A lender can also ask for loan security or collateral of equal or greater value of the loan amount. Any loan collateral should be spelled out clearly in the loan agreement before the loan begins. Lenders can also ask the borrower to find a co-signer on the loan, possibly another relative or friend with solid credit and financial stability. In the event of a default the cosigner would be liable for the debt. A cosigner can also help monitor the loan and motivate the borrower to stay current on the loan.

Once the loan has started both parties need to determine how they are going to track the loan and document the repayment schedule. The tracking and repayment status must be transparent for both parties. If the tracking will occur offline then both parties should save checks and other documents. If you use Loanback, all your loan transactions will be available online for both parties to review and approve. LoanBack can also help you set up simple monthly email payment reminders.

The best way to preserve your relationship and ensure a successful conclusion to your personal loan is to make sure you build the loan properly at the outset. Using a service like LoanBack can help walk you through the process of building and formalizing your loan, and will give you the tools to easily track and monitor it over time.

More Information

What to do when friends and relatives don’t pay you back –