February 13, 2015

Avoiding the Pitfalls of Loaning Money to Family or Friends

Andrew P. Nicol Authored by: Andrew P. Nicol Posted in: Mortgage Enforcement & Collections

Loaning money to a family member or a friend can be a tricky situation: a personal relationship exists between the parties, the borrower may have a sudden financial hardship, and the lender may have a strong desire to help that person. Generally, it is better to provide a gift of a smaller amount—not expecting to get repaid—rather than lending a larger amount and potentially having problems collecting the money down the road (not to mention the effect this can have on a close relationship).

However, the reality is you may wish to loan money to a family member or friend. If you are going to do so, here are some practical steps to consider when lending money to a family member or friend:

Can the Person Repay You?

Discuss the Terms of the Loan

While you may feel uncomfortable talking about money with a close family member or friend, it is better to do this at the outset, so both sides understand what to expect. Some issues to discuss include:

Put the Terms of the Loan in Writing

Have all those terms discussed above put in a written agreement and have both parties sign it. This cannot be stressed enough. While an oral agreement can be legally binding, it is much easier to have everything in writing, particularly if there is a dispute down the road.

Consider the Implications of Default

You want to hope for the best, particularly when you are loaning money to a family member or a friend, but it is always best to prepared for the worst. The worst (setting aside the breakdown of a personal relationship) meaning you are not getting the money you loaned back. Before you loan money to a family member or friend, some things you may want to consider:

The above are some things a person should consider before lending money to a family member or friend. Of course each situation is unique. If you are looking to loan a significant amount to a family member or friend, consider having a lawyer draft a loan agreement. If you are in the situation of trying to collect money from a family member or friend, speak to a lawyer who can determine a cost-effective solution for you to do so.

Connect with a member of our team today. To contact a member of our Mortgage Enforcement & Collections team call us at 902-469-9500 or 1-866-339-3400.

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