Out of the kindness of my heart, I have been thinking about loaning a friend some money to pay off his debts. It won’t be that much, at most like around $2000, but just in case our friendship fades away, I was thinking of writing just a simple contract. I would write it out myself and state the payment terms and have him sign it. I don’t want this to get too complicated, such as bringing in lawyers or whatnot but if something happened, would this signed piece of paper be considered a legal document if he stopped paying me back and I would have to take some real legal action?
First, some free advice: He ain’t gonna pay you back. And the fact that there’s something in writing isn’t gonna help a lot when he stops returning your phone calls and disappears.
Second, the answer to your question is, that probably it’s legally binding, depending on the exact terms, the law in your jurisdiction, etc. etc. But see my free advice above.
(standard disclaimer about legal advice)
You can get something “binding” but still loose out. The debt would presumably not be secured by anything, else the guy would get a loan by other means.
Real legal action would probably be taking the guy to small claims court (no lawyers… else, it’s already more than 2k in expenses). You may win a judgement against him, but it’s then up to you to collect. If this guy is having trouble paying off 2k, he’s not going to have lots of cash lying around.
I don’t think it’s a good idea to loan friends money, except in the most dire of circumstances, and then only if you are willing to think of it as a gift that MIGHT be repaid.
This comes up on Texas Justice all the time. 
Judge Larry Joe always says if you’re going to loan your friends money, you should always write out a promissory note and get them to sign it so it’s not just your word against theirs as to whether or not you actually loaned the money and whether or not you actually expected to be paid back.
(IANAL, just a law student who finds Texas Justice a lot more interesting than reading my Contracts homework)
I have heard that one advantage of getting a signed note first is that you get to take it off your taxes later as a loss. Anyone confirm/deny this?
It won’t be that much, at most like around $2000
Oh, to have a financial setup where 2k “isn’t much money.” 
Seriously. Take your money, douse it with some gasoline and light a match. The second you hand over that cash to your friend, he will develop amnesia and you will be out the cash and a friend. He will not pay you back. I guarandamntee you he won’t pay you back. He’ll have his creditors off his back (and note he hasn’t been paying THEM back) and it would take too much trouble and money for you to drag him to court. He knows this.
And don’t even THINK of cosigning a loan for him. This guy has already proven he can’t handle money, and he will leave you with the burden to pay the bank back.
If this guy is a true blue, thick-and-thin, would-give-you-his-bone-marrow friend, give him the money outright. Make it clear it’s a gift and you won’t accept repayment. Yeah, you’ll still be out the money, but he was never gonna pay you back anyway. Plus a $2,000 gift is nothing to sneeze at in the karma department. People who do good things for people do indeed get their reward, eventually. You know in your heart if this guy would do the same thing for you were the tables turned. If he would, go for it. If he wouldn’t, tell him he’s outta luck.
IANAL (studying to be a paralegal), but a homemade contract would probably be binding but ultimately not worth the paper it’s written on. If he bails, you probably can’t afford to drag him to court, and even if you did win, you can’t get blood out of a turnip. This is my opinion, not legal advice.
One advantage of loaning a friend $2,000 is that any friend who would ask for such a loan is worth $2,000 to get rid of, which is the likely result:D
It doesn’t take much for a small claims court case, my friend had a bike repair business and got ripped off constantly by people he was on a friendly basis with, all he did was make a claim based on the chit they signed for the repair. Any professional money lenders (banks) require collateral, then there’s the Soprano-style loans, you get hurt really bad if you don’t pay it back.
We are perhaps digressing from GQ parameters but… Generally, paying back borrowed money is a very difficult thing for people to do, it takes collateral or clout to force it out of them. Listen to an older guy who’s had a long and interesting life, private money lending is an insane thing to do, I cannot count the good friends I’ve had who have disappeared over time. I’ve loaned significant sums ($5,000, $10,000) to friends and been paid back but these were good people, business owners, and they had trouble fitting me into their budgets and it took them longer than expected to pay it back. One tried to make me feel guilty for putting the pressure on for repayment. The mind game aspect is very stressful, you ask for your money back and your “friend” gets upset and you start to think that you’re decreasing your chances of being paid back if you ask for it back, in fact the guy’ll stop being your friend because you’re always bugging him for your money back. I’ve had two close female friends who, in their younger days, were paying off car loans they co-signed for, and guys they never saw anymore were driving around in the cars. Sorry but, odds are very high that you WILL be ripped off.
By the way, if you’re still thinking of lending this guy money after all the words of encouragement here, you might ask the guy if he has a family member with a house and steady job who will guarantee your loan to him.
When he says “no,” you might ask yourself why the guy’s own family won’t back him up.
That’s the problem – almost anyone who gets himself in a situation where (1) he can’t pay his bills; and (2) his family won’t help him (anymore); and (3) he needs to ask his friends for a loan, is, at a minimum irresponsible and probably addicted to drugs, alcohol, and/or gambling.
**
Agree, and he’s probably already gotten pretty good at bill-avoiding. Probably he has call intercept on his telephone. And he has 5 or 6 lame excuses at the ready.
Agree, and note that such people often know exactly what to say to make you feel guilty. Because you’re not the first person that they’ve taken advantage of.
I have to agree with the majority here. Unless your friend is suffering a VERY short-term financial setback, has financial obligations that simply cannot be put off for a month or two and also normally views $2,000 as “not that much,” you’d do best to keep your money in your own pocket.
Why trade places with his creditors?
If he can promise to pay you back at the rate of $100 a month for 20 months, let him see one of those credit counsellor firms and arrange to do the same through them.
Best to keep your money out of your friend’s pocket and his hand out of yours.
You asked for advice. You have gotten it. Most likey not what you want to do as it is contrary to your inclination. If you feel compelled to loan the money get a contract, give him the money and forget it. If it is repaid you are ahead $2000, if not you have lost a ‘friend’ and $2000
My BIL in england, a long time ago, ‘borrowed’ $900 (more like $2500 today), made one paltry payment from his serviceman’s pay.
He never made another payment nor mentioned it again. My spouse wouldn’t let me mention it either. Bye bye to balance. Later found out it was for an ‘operation’ for the woman who he later married.
See “Unsolicited Advice” in IMHO.
For what it’s worth, I do believe that most people are in fact credit-worthy. In my business, I rely on my customers paying the bills I send them. I find that I get paid 80-85% of the time. Half of them without any kind of pestering.
But the thing is, if a person is reliable and credit-worthy, he or she is very unlikely to be in a situation where he or she needs to try to borrow money from friends.
As I alluded to before, there is a category of people who are financially irresponsible. A lot of them have drug, alcohol, and/or gambling problems. Frequently, their families have given up on helping them. These are the people who need to try to borrow money from friends.
If he’s really a friend, just give him the money. Consider it an unexpected bonus if he pays you back. Making this out to be a real loan is more likely going to result in the ending of this friendship.