Wednesday, February 3, 2010

Should I Lend or Give Money To A Friend

Eventually you will be faced with a similar decision . Do you lend a friend or family member money or do you simply give the money as a gift? Well this decision is yours to make the only person you need to discuss this with is your spouse is you have one. However all too often I see people make mistakes when they lend or give money. Today we will explore the difference and show you how to lend money properly if you decide to lend instead of give.

Here You Can Have This Money

If you decide to give money there is only a few things you need to do. First discuss the situation with your spouse. Both of you should agree on this matter, if you don't and still give the money it will inevitability cause stress on your marriage. The next thing to remember is that a gift is a gift, therefore never say "Here you can have this money it's a gift, if you want you can repay this after you are doing better". That's not a gift its trouble waiting to happen. If the person begin to do better and doesn't repay you will resent them and it really isn't fair. So make sure a gift is a gift that means no strings attached.

I Will Loan You The Money

If you decide to loan money you should still discuss the loan with your spouse just like the gift. Please don't think just because you are going to be repaid your spouse doesn't need to know. Both of you should be involved in making the decision.
The most important part of lending money, especially to friends and family, is creating a good Loan Agreement. The loan agreement will ensure that everyone involved understands their obligation. It is easy to say "Well my brother knows that I will be expecting interest for the loan", no not always. There are several problems with not having a loan agreement. Below are just a few.
·         The amount of Interest charged
·         When the repayment will begin
·         How much will be paid each month
·         When will loan end
·         When will the loan be paid
The truth is a structured payment plan will help ensure prompt payment. Suppose you said "Just pay me when you can, you know a few hundred now and then". You are asking for trouble. You will find yourself upset when they haven't paid you for a while especially if they go on vacation or buy a big ticket item. You will find yourself saying "Oh they got the money to go to Vegas but they can't seem to pay me $200". The final reason I suggest creating a loan agreement is when they flat out don't pay you. It is far less stressful to get your money back in court if you have a document that shows the agreement.

So How Do I Make A Loan Agreement

Well below you will see a template of a loan agreement. You can use it for loans and terms of any size. If you plan on lending a lot of money and really want to be safe I would fill the template out and take it to a lawyer and have him or her look it over. Then you can do is have this agreement notarized. What that does is keep someone from saying that they never signed the document. The only other thing I would do is ask that the payments are made with checks. When you go to court you can show the last payment  made before defaulting this would also debunk the "I never agreed to pay you".
Loan Agreement
THIS AGREEMENT is made on the ____ of _____  between   [Borrowers Name] residing at [Street Address] ("The Borrower) and  [Lenders Name] residing at [Street Address] ("The Lender")
1.       On the execution of this agreement the Lender agrees to lend to the Borrower the sum of [Loan Amount, Example $13,000] ("the Loan") on the terms and conditions set out in this agreement. 

2.       Interest on the Loan shall be calculated at a monthly rate of one twelfth of a nominal annual rate, the nominal annual rate being [The Interest Rate, Example 3%] and shall be charged on the balance of the Loan outstanding on a monthly basis beginning [Date, Example January 15th 2010].  Said interest shall be payable by the Borrower to the Lender monthly in arrears. The following formula is used to calculate the fixed monthly payment (P) required to fully amortize a loan of L dollars over a term of n months at a monthly interest rate of c. P = L[c(1 + c)n]/[(1 + c)n - 1].

3.       Repayment of the Loan shall be by monthly installments in respect of principal and interest in the amount of [Amount, Example  $739.50], payments are due one [Day, Example 15th]of each month.

4.       The monthly installments of [Amount, Example  $739.50] have been calculated to allow the Loan and interest thereon to be repaid in full within [Months, Example 18] months of the first payment. 

5.       The Borrower may repay the Loan and interest accrued thereon at any time after the date of this agreement without penalty.   
Payment Schedule
Payment Date and Number
January 15th  2010   (1)
February 15th  2010   (2)
March 15th  2010   (3)
April 15th  2010   (4)
May 15th  2010   (5)
June 15th  2010   (6)
July 15th  2010   (7)
August 15th  2010   (8)
September 15th  2010   (9)
October 15th  2010   (10)
November 15th  2010   (11)
December 15th  2010   (12)
January 15th  2011   (13)
February 15th  2011   (14)
March 15th  2011   (15)
April 15th  2011   (16)
May 15th  2011   (17)
June 15th  2011   (18)

_____________________________________                             _____________________________________
THE BORROWER ([Borrowers Name])                                     THE LENDER ([Lenders Name])

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