How to not break legs in case of default?
January 30, 2007 5:26 AM   Subscribe

How do I lend someone money?

I would like to lend someone 5000 dollars. What documents should I draw up to protect myself in case the person is late or refuses to return the loan (it is low risk)? The loan would be for a period not exceeding 60 days. Also, how can I get around the usury laws in Canada (max 60% interest) if the person has offered 15% over the 60 days (90% APR)?
posted by Clementines4ever to Work & Money (26 answers total) 2 users marked this as a favorite
I would not loan money to anyone who claims they can repay you 15% interest over 60 days. I smell either a gambling problem or a ponzi scheme.
posted by cosmicbandito at 6:30 AM on January 30, 2007

At that rate, you can afford an hour of a lawyer's time.

Just in case this person is a friend or relative, you should not proceed unless, in case of non-payment, you're willing to either write off the loan to preserve the relationship or write off the relationship to collect the loan.
posted by winston at 6:30 AM on January 30, 2007

Circle Lending

(I believe a mefite started this. Could be wrong.)
posted by null terminated at 6:49 AM on January 30, 2007

a $500 loan isn't worth an hour of a lawyer's time.

Circle Lending seems potentially useful, especially if their fees are low/non-existent.

Expect to lose the money. Consider it a gift, even if you don't tell them that. Be pleasantly surprised if they pay you back.
posted by Tacos Are Pretty Great at 7:09 AM on January 30, 2007

Tacos: $5,000, not $500. I think it's worth an hour of a lawyer's time.
posted by croutonsupafreak at 7:17 AM on January 30, 2007

Sounds like a bad idea to me. Is this someone you know and trust, or someone who turned up and offered 15% interest out of the blue? If the latter, I'm with cosmicbandito: scam or gambling problem.
posted by languagehat at 7:25 AM on January 30, 2007

I'm with winston and TAPG - if it's a friend or relative, only give them the money as a gift. You may call it a "loan" if that's necessary to preserve the recipient's pride, but in your heart consider it a gift. If you do call it a loan to the person's face, make clear that you will not charge any interest.

This assumes it's some kind of emergency on the level of "I'll be evicted if I can't come up with $5000." If it's not an emergency, just some money-making scheme, don't do it.
posted by DevilsAdvocate at 7:26 AM on January 30, 2007

Get it in writing because when you have to write it off as a bad debt, you will have proof for the Canadian IRS. The only way the usuery law will come into affect is if one of the two parties to this contract bring it up to the authorities. If the person you are lending it to should die during the loan period, his heirs would likely contest the rate too. I suggest you lower the rate to the maximum allowed by law. If you are doing this as a favor to a reliable friend, the lower rate should not matter. If you are doing this for the money, don't because this sounds like a scheme. If it is a bridge loan until some known asset comes in or is sold, get that asset as collateral for the loan.
posted by JohnnyGunn at 7:30 AM on January 30, 2007

Let me get this straight. What you are proposing is a criminal offense in Canada, and you want to know how you can protect yourself in a possible civil action?

Err. . .
posted by Neiltupper at 7:37 AM on January 30, 2007

Ask yourself this question - if the loan is so low risk, why aren't they getting it from a bank--or even a credit card--where the interest rate would be significantly lower than what they're offering you? If you can answer that question with an answer that still leaves you with a warm fuzzy feeling that this is as low risk as you think it is, then you probably don't need to worry about the paperwork all that much. If you do still need to worry about the paperwork, then it's not really a low risk situation, and you should rethink altogether.
posted by jacquilynne at 7:58 AM on January 30, 2007

Simple answer: Do not lend anyone money. If he or she cannot use a credit card, or secure a loan from a bank, that is indication enough of a problem. Why set yourself up?


offer to buy him/her a beer and leave it at that. Do not even offer an explanation. Just a simple "no" will suffice.
posted by cvoixjames at 8:11 AM on January 30, 2007

If someone has offered you 15% over 60 days (assuming you mean they will pay you back $5750 after 60 days) that is an APR of 233%, not 90%. If someone is offering more than ten times as much as they might pay on a credit card, shouldn't that set off alarm bells?
posted by ssg at 8:58 AM on January 30, 2007

Two documents: a dated receipt for the money, and a promissory note specifying the amount and date you are to be repaid. Both are signed and dated by yourself and the lendee.

Since, as you point out, the contract is invalid on the face of it where you live due to the interest rate, don't expect it to hold up in court. There's a nonzero possibility that the lendee is perfectly aware of this.

A lot of people would take security for a loan like this, which would be documented on the promissory note. Does the person own anything portable worth $5K? (Motor vehicles are a bad idea; their title is often encumbered, meaning you can't receive them in the case of default.)
posted by ikkyu2 at 11:17 AM on January 30, 2007

Yeah, I don't really see "in case of" default, here. More like "inevitable". Unless this other person has something worth more than $5000 that you can keep until he or she pays you, you're never going to see that money.

Never give unsecured loans unless you'd be perfectly happy if they were never paid back.
posted by vorfeed at 11:27 AM on January 30, 2007

If someone has offered you 15% over 60 days (assuming you mean they will pay you back $5750 after 60 days) that is an APR of 233%, not 90%.

How do you figure?
posted by Kwantsar at 11:55 AM on January 30, 2007

One more time: Do not lend the money. Let me put it to you this way, if you have 5K of discretionary income, why don't you put YOUR money to work for YOU? A mutual fund, a money market fund, a high yield savings account, or an index fund of stocks. Talk to a financial institution!

I will say this politely as possible and that is that I do not think you are thinking clearly on even considering a loan. What are you gonna do when he/she defaults? break his arm?
posted by cvoixjames at 12:23 PM on January 30, 2007

Dont do it. Trust me

1 year later, and I'm now taking to her court. She did pay me back *some* of it but not the majority.

I did get a written agreement to all the dealings but my 'friend' of 10 years+ took me for a ride.

I will never lend anyone other than my partner or family money ever again, and in those cases it will be money I can afford to lose.

Sad really isnt it?
posted by daveyt at 12:29 PM on January 30, 2007

Going to chime in and say don't do it. It has "scam", or at least "inevitable default" written all over it.
posted by sleeplessunderwater at 1:35 PM on January 30, 2007

Poster: Since you're not anonymous, what's keeping you from dropping by and providing more information? To give useful advice, we need to know some basic stuff, like whether you know the borrower and whether you're trying to be helpful or to make money.
posted by languagehat at 1:49 PM on January 30, 2007

Agree with languagehat. Seems like there is a lot of "post and run" on this forum. How about some feedback? or are you just trolling the waters just to see who is gonna bite?

This is an aggravation of mine here. If you are not willing to engage in a dialectic over YOUR issue, you make everyone here who tries to help feel used or at least that they wasted their time replying to your question.
posted by cvoixjames at 3:02 PM on January 30, 2007

languagehat & cvoixjames: I'm not the original poster, but I have a bad habit of coming up with pressing questions right before bed or right before I head to work. Maybe give him/her a little more time to follow up?
posted by croutonsupafreak at 3:40 PM on January 30, 2007

My best friend once gave me the most sage advice about borrowing/lending money I've ever heard: "Don't lend money unless you're comfortable never seeing it again."
posted by gcbv at 5:18 PM on January 30, 2007

Sorry about the delay as I was away from the computer.

I was looking for comments similar to ikkyu2's in nature as I wasn't asking whether it was a sensible thing to do.

Thank you all for your comments. I did not mention this in my post, but I will only make a secured loan (don't ask me why the person I want to lend to won't go to an institution for a secured loan at a lower rate).
posted by Clementines4ever at 5:50 PM on January 30, 2007

Tacos: $5,000, not $500. I think it's worth an hour of a lawyer's time.

Honestly, I still don't think it makes a difference. $5k isn't exactly a huge sum of money. If they can't get it from a bank, or from savings, or whatever, then the debt is probably noncollectable in case of default anyway. Thus meaning that the lawyer is just another couple hundred bucks wasted.

If you can afford to lose $5k, and you want to help your friend, go for it. Give em the money. See if they ever pay you back. If you care about $5k, then skip the donation, and help them find a second/third job.
posted by Tacos Are Pretty Great at 6:49 PM on January 30, 2007

(don't ask me why the person I want to lend to won't go to an institution for a secured loan at a lower rate).

I won't ask you - but if you haven't asked him, you're making a huge mistake.
posted by jacquilynne at 6:57 PM on January 30, 2007

A private loan wouldn't affect the borrower's credit rating. Or he could be doing something he doesn't want anyone to know about. My guess is he's buying a pound of weed.
posted by electroboy at 9:26 AM on January 31, 2007

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