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Making Loan Agreements with Your Family and Friends in Las Vegas

Virtually everyone borrows money, at different stages in life, to start a business, purchase or renovate their home, buy a car, for health reasons, or when they lose their job.

Lending money to family and friends is as risky for the lender as it is flexible for the loanees. For the lender, there is no certainty that he would be able to get his money back. Unrepaid loans can permanently damage their relationships. This is the biggest reason you should be cautious before you give your money to family or friends.

To allay your fears and eliminate the chances of defaulting, you should establish a simple loan contract with your family when they want to borrow money from you. If it is with a friend, you should consider the formulation of a personal loan agreement with them.

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The objective is to ensure that any amount you loan to a family or friend is repaid and that you are adequately refunded within the stipulated limits of the contract. Therefore, the importance of a loan agreement cannot be overemphasized.

Questions to Ask Before Giving Loans to Family and Friends

Before you give your hard-earned money to a family or friend for a loan, there are specific essential questions to ask. Answers to those questions will help confirm if you are in the right financial position to lend money at all, the risk level you are willing to bear, and the steps you might want to explore in case the loanee defaults.

The questions should, therefore, include:

  • How much can I afford to loan that will not affect my day-to-day expenses? How long can I afford to lend out my money?
  • Have they tried other Nevada personal loan options for obtaining credit?
  • Am I willing to explore litigation if they fail to pay back? Or is our relationship too special to risk a lawsuit to damage it?
  • Can I afford to write off the loan if it is not repaid?
  • If they cannot pay back the loan by themselves, will I be willing to help them in any other way to pay back the loan?

At this juncture, it’s worth stating that you shouldn’t lend out any amount you cannot afford to lose. That is, if the lack of repayment of the loan can affect your financial security in any way, it’s safe not to give the loan.

However, if you do not mind, you should create a legal agreement to provide you with extra protection in case of default.

Preparing a Legal Agreement for Family and Friends’ Loans

When you finally decide to lend a friend or family money, you should make a simple loan contract or legal agreement. This is a binding document that offers legal protection in case they default.

The legal agreement does not have to be complicated. It does not have to be long. However, it must be detailed, with all the terms and conditions of the loan clearly outlined. Thus, it should include the following essential information:

  •    Means of repayment

How do you want the loan to be repaid? By check? In cash? Or in some other form? This must be spelled out and highlighted in the details of the legal agreement.

  •    Schedule of payment

When is the due date for the loan? When do you want it to be repaid? The schedule of payment should expressly state the beginning and final dates for repayments.

Additionally, it should answer the question: will the money be paid back in installments, or will it be paid back as a lump sum at a specified time in the future?

  •    Interest rates

Do you want interest on the loan you give to that family or friend? Or do you want the loan to be interest-free? You decide. However, this has to be explicitly stated in the legal agreement as part of the terms of the loan.

  •    Penalty

The legal agreement should also outline the penalties that would occur if the money is not paid back. These penalties can include a modification of the loan terms, the taking over of the provided collateral, or the pursuit of legal actions in a small claims court.

  •    Third-party witness

Then, finally, it would be good if the document can be notarized. That is, to give it more validity, a third party should be present when the agreement is being signed and stamped.

Notarization will ensure that the document cannot be tampered with by the parties involved in the deal. Different copies should then be made and distributed to the promisor, the payee, and the witness.

Alternatives to Loaning to Family and Friends

Lending family and friends money is never a good idea. Numerous studies have shown that many do not pay back and those that do never pay back in full. Therefore, it might be advisable to recommend alternative sources for them.

The sources you recommend will depend on the purpose for which they want to take the loan. For example, if they are seeking to get a car, you can help them look for car loans. And if it is house renovation they want to do, you can help them facilitate a credit line for that.

There are loan provisions or credit lines for almost every kind of expense. Mortgage loans and home equity credit lines are alternatives that are worth exploring for a family or friend seeking to buy a house or renovate their home.

Finally, the proliferation of peer-to-peer lending platforms has also opened up more choices. And if the capital to start a business is what they want, they can contact the Small Business Administration, a governmental agency committed to financing small businesses.

Image source: Billy Kerr.

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