Top Reasons for requesting Informal Loans
- Poor credit score.
- No/ limited Insurance.
- Loans denied from the bank.
- Medical/ dental tourism surgery abroad.
Steps for requesting Loans from Friends & Family
- Present your case: Why do you need a loan? How are you going to use the money?
- Decide repayment terms: Either monthly installments or a lump sum?
- Set up a recurring transfer for payments.
- Agree on lender’s course of action if there is non-payment.
Loan Agreement between Friends & Family
The loan agreement with family or friends can be formal or informal. It should cover:
- Borrowed principal amount.
- Interest rate (if any).
- Repayment time and method.
Pros and Cons of Loans of Love
|No forms to be filled||Lack of clarity|
|Low or no interest||Payment default damages relations|
|Flexible repayment||Social Awkwardness|
Legal standing of the Loan Agreement
- Like any loan contract, you’re legally on the hook for the debt.
- Borrowing money is considered a type of verbal agreement.
- It has the same legal standing as many other types of debts.
- With the contract as proof, the lending party can sue in small claims court, get a judgment and then pursue collection activities on the loan.4
Quick Tips: How to approach for a Loan
- Be crystal clear about your own expectations – specify how long you need the money for.
- Be specific about the loan amount.
- Detail the repayment level you can afford.
- Draw up a formal written agreement.
- Plan a realistic repayment schedule.
- If you find yourself struggling to make repayments, be upfront and ask if you can pay smaller amounts or temporarily stop paying until you’re in a better financial situation.
According to Mark Beyer, a financial advisor with Edward Jones: “Document everything. As each payment is made, send a confirmation note. It may seem a bit formal, but you will be thankful when a dispute arises over how many payments have been made to date.’’5
Focus on three key areas to protect the lender & the borrower
- Protecting your relationships.
- Protecting the lender financially.
- Be sure to check with a local tax adviser before taking a loan.6
“Lending money to friends should be done with caution, if at all,’’ said financial expert Ric Edelman, author of The Truth About Money.6
Be cautious about loans between friends and family as defaulting in this may sour your relationship forever.
- Fay B., Loan Agreements with Family and Friends, Loan Agreement with Friends and Family, Retrieved on 19 December 2017 from https://www.debt.org/credit/loans/friends-family/
- How to borrow from family and friends, Wall Street Journal, Retrieved on 3 January 2018
- Lee S. & Persson P (2015). Financing from Family and Friends, Retrieved on 3 January 2018 from https://web.stanford.edu/~perssonp/FFF.pdf
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