Though I have run this
article in the past it is well worth a repeat. This
article should be entitled “Do as I Say, Not As I Do”,
because we have all loaned money to friends and
relatives over the years. Some of these loans have
probably had disastrous results and, hopefully, this
article will either help you say “no” or help put you on
firmer footing if you say “yes”.
To start with, it goes against my grain (like scratching
on a blackboard) to lend money to friends.
If the friend is a good friend and you say, “I’m sorry,
Harry, I don’t want to risk our friendship over money”,
the friends will understand. If the friend doesn’t
understand and gets mad, too bad; you have lost the
friendship but not the money. If you make the loan and
the friend gets behind in payments you may be amazed at
how this good friend starts ducking your phone calls.
The friend may actually resent your wanting repayment
when “he is having trouble—and you can afford it”. In
this case, you will certainly lose the money AND the
friend.
Relatives can be worse. A nephew requests $10,000 to
invest in a business. The nephew has never been the most
honorable of all relatives and your reaction is to say
no. Your spouse unfortunately goes to bat for the nephew
and makes it clear that you are being stingy, uncaring,
spiteful, etc. and that the nephew is really a “good
boy”. Very reluctantly you lend the money and voila! The
above scenario takes place with repeated excuses,
unreturned phone calls, bitterness, etc. After all, the
nephew is “having trouble—and you can afford it”. Now
comes the kicker: It is virtually impossible for you not
to tell your spouse “I told you so”. Even if you have
more brains than that, friction will definitely develop
in your marriage over this, worthless nephew that you
knew you shouldn’t have loaned money to in the first
place. In the circumstances above, you may have lost
your friend and money. In this series of events you may
end up losing your money and your spouse.
That reminds me of an acquaintance who told me he has
had four wonderful years of marriage. That puzzled me
and I said, “You have been married more than four years,
haven’t you?”
His answer was that he had been married for 15 years but
had four GOOD years of marriage.
This is not a primer on how to say no. This is just some
obvious advice about what CAN happen in the above
circumstances. Now let’s get to the real meat of this
article. Assuming the friends, relative or spouse
convinces you to do this loan, remember this article and
merely ask the question, “Secured by what?” Why not
secure this loan with a trust deed on their apartment
house, |
residence or land in Big Bear? Why not secure it by
their automobile or personal property? Does that
make you an ogre? Perhaps it just makes you a wise
businessperson. In the event of real estate,
definitely have an escrow company do the paperwork
and get a title insurance policy. What you think is
going to be a second trust deed might be a fourth
trust deed behind an IRS lien and delinquent real
estate taxes. If you had the guts to ask for real
estate as security, a little more guts will ask for
the regular escrow and title policy, paid for BY THE
BORROWER.
In case you think this doesn’t apply to you and
the loan is only $500 to a friend, it does apply. In
this instance write up a clear promissory note for
the amount of money, including the interest rate,
final payment date and monthly, quarterly or yearly
payments if applicable. Remember to be careful about
the usury ceiling and not make this loan in excess
of 10% for personal or
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household purposes. If the loan is for business
purposes, check with an attorney to determine the
maximum rate you can charge (that month). It needs
to be checked monthly.
Now maybe you think I really don’t understand. This
is your fiancée or girlfriend or son or business
partner or fraternity brother. You don’t have the
audacity to demand security or even the written
promissory note that I STRONGLY RECOMMEND. In this
case you think I may be too businesslike or harsh.
Merely watch “Judge Judy” or “The People’s Court”
for not more than two programs; I guarantee you one
of them will be a situation just like yours where
the boyfriend is saying the loan was a gift, the
fiancée is stating that the loan was in cash with no
receipt, etc., etc.
The real question is, do you want to take the risk
of making the loan in the first place and perhaps
losing the money and the friend or relative? I
assure you, loss of money can turn into a very, very
bitter feud with a longstanding friend or, worse, a
relative. Certainly there are many trustworthy
friends and relatives who you would be happy to make
a loan to; so be it. Merely skip down to the
security part of this article or, AT LEAST, get a
written instrument. If you are not sure how to write
one, merely pick a “Promissory Note” up at the local
stationary store. When I first devoted a column to
this subject, I received many calls saying, in
effect, “Boy, are you right”.
Please don’t cut this out and present it to your
spouse as “I told you so”. I don’t wish to be the
catalyst for domestic violence.
Peter Rosenthal
VIP Trust Deed Company |