If you’re considering borrowing money from a family member or friend, you’re probably understandably nervous. Such loan arrangements can be risky business, both financially and personally. As a borrower in this type of arrangement, you not only have a financial responsibility to your lender, you also have a personal responsibility to them and your relationship. When a loan agreement between family or friends goes bad, the personal relationship that underlies the loan is often a casualty. Luckily, there are simple steps you can take to help protect your relationship and ensure the success of your loan contract.
Before you approach your potential lender, prepare yourself and do your research. Ask yourself the following questions to gage whether or not you are ready to begin a loan agreement.
- Do you know exactly what the loan will be for (the loan purpose) and have you calculated precisely how much you will need for this purpose? - Are you likely to be able to repay the amount you are requesting? - Have you calculated how much you will be able to repay at a time, how often you will be able to make repayments, and the date you will have the loan completely repaid? - Have you researched interest rates and included a reasonable rate in your calculations? - Have you considered what you will offer as collateral (the asset or assets that will be transferred to your lender if you cannot meet your loan obligations) should your lender want loan security - Have you lined up a cosigner (someone who agrees to be liable for the debt if the borrower cannot repay) should your lender request one?If you’ve answered “Yes” to all of these, then you are well on your way to making a sensible loan agreement. Here’s what to do next:
Step 1: Choose a Loan Agreement Method
Never rely on verbal agreements, and don’t leave anything open to interpretation or argument. Use a service like LoanBack to formalize the loan in a legally recognized loan contract that clearly states all the terms of your agreement. This way, both parties will be on the same page from the very beginning, and the chance of misunderstandings and later disputes will be greatly reduced.
Step 2: Approach Your Lender and Create Your Loan Agreement
Now that you are fully prepared, approach your potential lender with your proposal. Create the loan agreement together. You can read more about the essential terms of a loan agreement in A Borrower’s Guide to Friend and Family Lending. If you choose to manage your loan through LoanBack, you will be asked a series of simple questions about your loan terms, and then a legally recognized loan agreement will automatically be generated for you.
Step 3: Create a Repayment Schedule
Don’t expect your friend or family member to “cut you a break” when it comes to a repayment schedule. It is your responsibility (and in your relationship’s best interest) to make your payments in full and on time. Agree on a realistic repayment schedule before any money changes hands, and then stick to it. With LoanBack, the repayment schedule will be generated with your loan agreement, and you can easily set up helpful email reminders so you never forget when a payment is coming due.
Step 4: Track Repayment
Agree with your lender on one method for tracking repayment. The tracking and repayment status must be transparent for both parties. If you decide to track the loan offline, both parties must be vigilant about saving checks and other documents, recording every payment made, and ensuring interest and principle calculations are always up to date. If you use LoanBack, all your loan transactions will be available online for both parties to review and approve, and interest and principle calculations will be maintained for you.
The best way to preserve your relationship and ensure a successful conclusion to your loan contract 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 - Helium.com