When I was a student I lived overseas for a couple of years, and I had a friend who used to hang out with a certain local family. During mealtimes, the parents would frequently mock Americans and their lives of luxury and indulgence, and they had a little kid who would also join in. So my friend asked the kid “what exactly are these luxuries that the decadent Americans are indulging in?” The kid thought a bit and said “fresh air”.
As my friend put it, this kid had no real idea of what luxuries were available in the world, but he sometimes saw his parents relaxing by going out and getting some fresh air, so he figured these decadent Americans much be really really into a lot of fresh air.
Old joke: a guy immigrates to America and goes to work selling apples on a pushcart outside a bank. One day a fellow immigrant from his old hometown sees him and asks him how he’s doing. He responds “pretty good, I actually some money saved up in an account in this bank.” So the friend asks him to lend him some money. He responds “I’m sorry, but I have an arrangement with the bank. They don’t sell any apples and I don’t lend any money”.
We did this, from my parents, and I believe they financed at least one of my sibling’s finances. But it’s all written up, mutually beneficial, and whole it’s real money, it’s not enough to cripple them if I suddenly couldn’t pay because I got sick or something. And if I got so sick I couldn’t pay my mortgage, they’d be the ones to help, anyway.
The big thing about having it written up is that if I did default or something, it would come out of any inheritance in the end.
Well, the $5K I borrowed from my friend and paid back in 4 years certainly made both of us feel better. When my brother was buying his first house, he borrowed money from my friend and also paid it back. I’m sure most loans of that sort work out well. And I forgot till now. When my son bought his first house, he thought he had arranged a 90% mortgage (and had a letter saying so), but when it came to settlement, the bank reneged and he needed $10K quickly. Also the bank insisted the money had to be a gift and not a loan added to their loan. So I gave him a “gift” of $10K and a year later received a “gift” back of the same amount. Since his and his wife’s income was sufficient to save that much in a year, I think the bank was just being asinine, but that’s another matter.
One thing I found out through experience is that if you end up in court, any documentation is better than no documentation. If you’re not comfortable doing something like drafting up a contract to be signed, make casual mention of the loan in some recorded way like emails or texts. Something like “I’ll be able to get the $XXXX for the loan you need on Friday. Can you meet me at the bank that afternoon?” If you are in a one-party recording state, record a conversation where you talk about the loan with this person. Even if you don’t have written, signed repayment terms, relevant communications of any kind establishes that you did loan the person money. It will carry a lot of weight and the judge can award damages if the loan hasn’t been repaid in a reasonable amount of time as decided by the court.
If you feel you have to do all that with a friend, just don’t lend them the money. Hell, if it’s even crossing your mind that you might take them to court over it, don’t lend them the money.
Several years back, we helped a nephew through his university education by lending him some money. I asked my accountant if I could write it off my taxes. He said I couldn’t. However, he said if I had the lad sign a promissory note, and he failed to pay it back, I could write off the loss. As it happened, he did pay it back.
This is straying somewhat from the discussion, but it could be useful information.
Yeah, if you want documentation so you can write the loan off when they don’t repay, go for it. If you think they will be more likely to repay you if there are written documents, sure, draft something. But anything that leads to “taking a deadbeat friend to court” is just a bad decision. Your friend won’t have the money, and won’t pay. You will lose a friend. And you will both feel bitter about it.
I’ve always gone with the “don’t lend money to a friend if you will be upset not to get it back”. I’ve made tons of trivial loans (hey, do you have any quarters so I can pay this meter? Do you have cash on you so I can buy something from this street vendor?) I think we once made a loan of enough money to matter, but I don’t actually remember whether they paid it back.
I lost a friend over lent money. I’ve gone back and forth over the years as to whether or not his friendship was worth losing, but I sometimes miss the occasional catch-up talks over a beer or two and lament that we don’t have that anymore because of a $350 “loan” that went bad.
I should have just told him that I had only a quarter of that amount to lend and been okay with losing it, and then offered up a little more if he demonstrated his ability to pay me back.
Just because they don’t have money now doesn’t mean they won’t ever have money. Five or ten years later they likely won’t be in the same financial situation and may have the ability to pay the loan back then even if they have “forgotten” about it. But it only really makes sense to go through this hassle for significant amounts of money.
I never make loans. If I can’t afford to just give it, I don’t. I also don’t concern myself with how other people spend their money. Once you give a gift, it is none of your business what is done with it.
If you do decide to make loans, be official and have the loan and the repayment requirements and consequences if breached in writing. Get it signed. And once loaned what it is used for is none of your business. What they do with any of their money is none of your business. You only have to be concerned with the contract and it’s compliance.
