Lending Money to Friends and Relatives

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By PETER ROSENTHAL, President
V.I.P. Trust Deed Company
2003

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 friend 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
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