Money for the American dream...

May 18, 2008 9:36 AM

What's the best way to loan money to a friend?

Besides the obvious answer that most will come up with of "Don't do it at all", does anyone have experience with making a personal loan (1500 US) more official?

The friend specifically suggested having some sort of documentation and interest involved in the payment process. How should I go about doing this?

And to avoid any speculation in the responses, the loan is to help cover costs associated with filing for citizenship.

posted by odi.et.amo to work & money (26 comments total)

Basically, you agree what the terms of the loan are, and then you write it down. e.g. is there a deadline for full payment or a series of regular payments, what's the interest rate, and anything else you've agreed on.

I wouldn't worry about making it lawyer-proof. If it did come to that, you'd be in small claims court anyway.

You should be aware from the start however that, if things go wrong (and it can happen to anybody), you're going to have to choose between the money and the friendship.
posted by winston at 9:46 AM on May 18, 2008 [1 favorite]

A while ago I read about Virgin's company VirginMoney which is designed to do exactly this, I haven't used it however, so can't vouch for it. The concept seems sound enough though and they're not a fly by night operation. . .
posted by jeremias at 9:52 AM on May 18, 2008 [1 favorite]

Just make sure that you have something written down on paper that you both signed and you both have copies of that stipulates at least basic repayment terms. Also second what winston wrote above, if something does go wrong you'll have to choose between the friend and the money.
posted by sumobob at 9:56 AM on May 18, 2008

When you give a loan to a friend, then write off this money. Just do it, and when you get it back, you'll be pleasantly surprised. Friendships do not fail because the lender wants his money back, it's usually because the recipient feels guilty and under pressure to return the money, and so breaks off the friendship.

So do not put deadlines in the document. Rather, let the person pay you $20 a month or so, and set this up to be automatically transferred from his bank account. It keeps the stress away from both of you, and when he has extra cash, he will pay you back in chunks.

Forget the interest. It can be a major point of friction, and it's unethical in my opinion anyways.
posted by markovich at 10:03 AM on May 18, 2008 [2 favorites]

Agreed -- if you're loaning money to a friend, write it off. If you can't afford to write it off, and want to keep a friend, don't loan the money. There's nothing like the inflexible terms of a repayment agreement to screw with a friendship, from everything I've been told.
posted by Alterscape at 10:23 AM on May 18, 2008 [1 favorite]

Good suggestions here. I agree that if you value the friendship you should, internally consider it a gift. That doesn't mean you can't address the issue and ask that the terms be followed through on, or that you just have to throw up your hands and be a doormat if he doesn't pay it back. Don't let it be the elephant in the room, though.

I would not loan any money that you would have to depend on repayment in order to meet your obligations, like money you have set aside to make a tax payment or something.

I had to be on the receiving end of friend-loans a couple times during some circumstances beyond my control. The friend who loaned me the money too the attitude that I could pay it back in a lump sum or in payments whenever I could. He never asked about it, it never impeded our friendship, I never felt I had to answer to him for how I was spending my money, and I paid it all back when I said I would. In lieu of interest, which he did not want, I took him out to a nice dinner and gave him a gift card.

He also knew that if the roles were reversed, there would be no hesitation on my part to do the same for him.

It can be done, but it's not easy.

Good luck.
posted by Fuzzy Skinner at 10:25 AM on May 18, 2008

You can get free promissory note forms here.
posted by hjo3 at 10:31 AM on May 18, 2008 [1 favorite]

Nothing really to add except that since the paperwork is largely for your friend's peace of mind/sense of ethics, you needn't involve a lawyer. And nthing to not involve interest.
posted by desuetude at 10:32 AM on May 18, 2008

just write it down and make sure you both agree on the terms, and both keep a copy of the terms.
posted by rmd1023 at 10:41 AM on May 18, 2008

Take them to a bank.
posted by unSane at 11:00 AM on May 18, 2008

I agree with hjo3's recommendation of a promissory note. It's simply a document saying "I loaned you $X. You promise to repay $X (potentially + $Y) within Z timeframe." Your friend signs and dates it, you hold it. Optionally get him to have it notarized. No lawyer needed.

If you insist on interest, make it a flat amount (e.g. the note says, "you repay $1600") rather than some percentage rate you need to keep calculating.
posted by mkultra at 11:16 AM on May 18, 2008

A while ago I read about Virgin's company VirginMoney which is designed to do exactly this...

Virgin purchased CircleLending here in the States last October. Previously on MeFi.
posted by ericb at 11:31 AM on May 18, 2008

(I watch a lot of Judge Judy, so I consider myself an expert in failed small-scale loans between friends.) The only thing I would add to the above info is to write up a receipt every time your friend pays you back, something like "so-and-so has given me $100 today, 05/18/08. The current balance of the loan is now $500 paid, $1000 left. signed [yourname] [friendsname]" and make sure both of you have a copy of it.
posted by phunniemee at 11:35 AM on May 18, 2008

Do they have anything of sentimental value that you can keep safely in the meantime?
posted by Brian B. at 11:44 AM on May 18, 2008

unSane writes "Take them to a bank."

A small loan like this is very hard to obtain from a bank. It's one of the reasons the pay-day loan companies are able to act as they do.
posted by Mitheral at 11:45 AM on May 18, 2008

I loaned a friend a similar amount of money once. We outlined the terms in email and then she gave me a series of post-dated cheques to cover the payments. Worked fine.
posted by crazycanuck at 11:55 AM on May 18, 2008 [1 favorite]

Promissory note as stated above.
posted by lalochezia at 11:57 AM on May 18, 2008

Lots of good suggestions here.

If you can't afford to write off the loan then do yourself a favor and agree with your friend up front that repayments will be recorded as well, with your friend initialling it each time.

If you do this, you probably didn't need to. It always helps to make sure things don't go wrong, rather than discover later that you should have done this and are now out of pocket as well as out of friend.
posted by w.fugawe at 1:15 PM on May 18, 2008

I loaned a friend a large chunk of change at one point to help him with the down payment on his house. Said friend had a job, a good track record with money, and just needed a small amount more in order to meet a house deadline. We outlined the terms of the deal -- it was a little unusual, I was sort of pre-paying rent for a situation that I was anticipating would happen in the future -- and wrote it down. I said goodbye to my money and was pleasantly surprised when it was returned [with interest, though that was not part of the deal] when my frind sold the house three years later.

So yeah, my feeling is if you have misgivings about your friend's ability to repay the loan that you only make the loan if you are comfy/flush enough to potentially consider it a gift. Make the repayment terms far enough out so that your friend can reasonably both replay the loan and also pay his bills etc. and be clear about your expectations -- i.e. do you want all the money back at once, are payments okay, is barter okay, etc. You may want to build in contingency plans such as what happens if the loan is NOT repayed, or your friend leaves the country or something else weird comes up. I also agree with some fixed interest amount and a fixed "all money will be repaid by X" deal. Try to make it as simple and realistic as possible for your friend to repay.
posted by jessamyn at 2:33 PM on May 18, 2008

1. Nthing Virgin Money, but a cheaper bare-bones option is LoanBack
2. Make the repayment period really long, so that the monthly payments are tiny (like $50 or something) and doable almost no matter what happens to your friend.
3. Be pleasantly surprised to receive the money in repayment--any other expectations may lead to disappointment.
posted by Kibbutz at 4:08 PM on May 18, 2008

I have loaned friends money in the same way I loan out books, in my mind I have given it to them for keeps. If I get it back, it's a bonus, but if they don't do it for some reason I've already considered it gone.
posted by tomble at 6:01 PM on May 18, 2008

Your friend might want a tiny intrest amount as a face-saver. If the friend insists, you might as well go along for 1% annual or something.
posted by Lesser Shrew at 6:05 PM on May 18, 2008

First, think of it as a gift that you're never getting back. Because if they can't repay, it's going to tear your friendship apart of you demand repayment. That said, if they have a history of deadbeating / mooching, don't loan money to them, because it will almost certainly cause you to resent them when they inevitably fail to repay.

OK, so you've decided to loan - they're upstanding fiscally responsible types.

Then:

- establish the terms. For example: 5% annual rate, repayment to start on date X.
- put terms on paper
- print two copies, both of you sign. they get one copy, you get the other
- loan then only what you can comfortably afford to lose
- see what happens.
posted by zippy at 6:26 PM on May 18, 2008

Another option is to buy something of value from the friend with the agreement that the friend can buy it back. Like a pawn shop but without ruinous interest.
posted by theora55 at 7:59 PM on May 18, 2008

Never loan your friends money.

That is the job of a bank. Your friend, despite not being a citizen yet, should be able to go to a bank and say "look at me, look at my finances, here is proof that I'm a good bet." and walk away with a line of credit that will cover the $1500 they require.

If they are unable to do this, this means that the banks have looked at your friend and said that they don't believe your friend is going to pay them back. That the believe it so unlikely, that they are simply unwilling to do so, even with a usurious interest rate.

Now if this is a good friend, you might want to help them stay in the country. You might want them to become a citizen. But ask yourself first, is their citizenship worth $1500 to you? If it is, just pay the fees yourself and make clear that it's a gift. That you love them and their friendship, and don't want some silly laws getting in the way.

If it isn't, apologize and offer to help them look for banks and credit card companies who will extend them credit, but do not do so yourself.

With some rare exceptions (usually between people who already have plenty of money), money creates friction and unpleasantness in friendships. You'll see your friend buy a snappy new outfit on the same week that you realized your favorite sweater is getting frayed, and you'll remember for an instant that your friend still owes you $1270.

Or your friend will be working hard, but will be nearly broke, attempting to pay you back, and will see you buy a Kate Spade bag on the same day that they get a surprisingly high cell phone bill, and they'll have a moment where they'll think how unfair it is that their life is so hard... they'll resent the terms they agreed to, or the interest, or just the disparity in your lives.

So never loan your friends money. It's a trap.
posted by Project F at 11:07 PM on May 18, 2008

Nthing the "think of it as a gift" thing. It's hard to do for that large a sum of money, but there is a good chance you won't get it back, and you need to be able to accept that right now. Otherwise don't go through with it.

And seconding phunniemee. Write carbon copy receipts if your friend decides to do installments, even though it seems awkward (you can buy a book of these for like $3 at Staples). I'm speaking out of experience from difficult family loans. (And hell, it even happens between friends over tiny things - I have a friend who always insists that it's my turn to take her to lunch, though I know I've taken her the last four times. Memory's a funny thing.)

All I'm saying is, you really don't want to be on either end of the "you're still short $500" argument. Can you imagine your knowing that your friend still hasn't paid you back, and he's blithely thinking that he's all free and clear? How would you bring it up, and convince him that he still owes? How would you keep him from resenting you and feeling gypped somehow?

Speaking of family loans, why don't you only loan like $500 and let your friend find other sources as well? $1500 is a lot to loan at once.
posted by GardenGal at 7:56 AM on May 20, 2008