Take the 2-minute tour ×
Personal Finance & Money Stack Exchange is a question and answer site for people who want to be financially literate. It's 100% free, no registration required.

I'm thinking of helping out a friend by lending him some money (~ $10k). I totally trust him, but I still have a feeling that I should have a contract or something similar.

Are there standard contracts out there for these kind of things? If not, what should a contract include? Should a 3rd independent person sign the contract as well?

share|improve this question
3  
Just wanted to say thanks to all the people who provided answers. They're all good, each in its own way. Definitely made me think more about the issue with friendship and money, which I didn't consider before. –  znq Sep 22 '11 at 14:35
    
Glad we could all help. Welcome to the site! –  ChrisInEdmonton Sep 22 '11 at 19:04
    
Just a question to think about - what would the use of a contract be? If it came to it, would you enforce it? Or just to make it more real (more likely to be remembered)? –  NickC Sep 24 '11 at 6:50
add comment

9 Answers 9

up vote 21 down vote accepted

Just to go against the grain here. Sometimes, loaning money to friends is the right thing to do. For example, they had a loved one die, and need the money to cover funeral expenses until the life insurance pays out. Here, you may consider it your ethical duty to loan the money (or you may not). It does not make sense from a financial point of view (you are unlikely to charge interest and you are taking all the risk), but sometimes you put your financial prudence aside because "being a good person and a great friend" is more important. It is true that the general rule should be not to loan money to friends, and particularly never loan money you cannot afford to lose. But there are exceptions to every rule.

I'll note that you may be best off with a plain-english, non-lawyery contract. Make it absolutely as simple as possible. As others have pointed out, specify a repayment date or schedule. Note what happens if they miss the deadline. Specify interest, if appropriate. Get it signed by you and the other person. And make sure you consider what happens if your friend doesn't honour the agreement.

For that kind of money, it is also worth considering collateral.

share|improve this answer
1  
Good points, Chris. OP didn't state reason or how he expected the friend to come by the funds to repay. Both are important. –  JoeTaxpayer Sep 22 '11 at 14:02
8  
This answer misses some important points, including: you have to be prepared to walk away from the money. And there is no indication of why this is an exception to the rule. –  DJClayworth Sep 22 '11 at 15:12
    
DJClayworth, I'm going to leave out 'be willing to walk away', as others have brought this up and I think they do a better job than me. As to why my example is an exception to the rule, I'll edit my answer to be a bit more clear. –  ChrisInEdmonton Sep 22 '11 at 16:10
add comment

The most important lesson is never lend money to friends, unless you are willing to forget the lent amount, if the need arises to save your friendship. Money and relations/friendship is a dangerous cocktail. Your friend may assume, as you are his friend he may get lenient treatment while treating the money. And if you harangue about the money your friendship may suffer.

So be careful while lending money to friends. If you make up a contract, your friend may ask why, if he isn't reasonable, as you are his friend. From personal experience, I forget about the lent money but jot it down somewhere. And when I am repaid I strike it off. I never discuss about the money or bring it up. People don't like to be reminded by a friend that they owe them money.

But refusing also isn't a viable option either. You probably have to take a middle path.

share|improve this answer
9  
+1 well said. I'd rather just give a friend $1K, than lend him $10K. –  JoeTaxpayer Sep 22 '11 at 12:02
add comment

Echoing the others, never lend money to a friend or family member, just give it to them. If you must have a contract in place then consider it a pay it forward type contract where the friend simply gives the same amount to someone in need at a future date.

The value of the friendship can never be measured, but it surely will be diminished by the amount of the loan between the two of you.

share|improve this answer
2  
+1 for your second paragraph. –  ChrisInEdmonton Sep 22 '11 at 13:58
    
+1 for the paying it forward –  Sverre Rabbelier Sep 28 '11 at 21:09
add comment

Typically the least formal agreement for any type of lending is a Promisory Note (of which you can find plenty across the web, although I'd suggest picking up a Nolo book from the library and using their templates -- I think the book holding your type of form would be the Personal Legal forms Book).

Still, $10k is a very large amount of money to lend to a friend and he probably is better off going to a bank and asking for an unsecured line of credit (not a credit card, but rather a general loan) and doing the money that way because typically that amount of money is small to the bank and they will already have the licenses/assets in place to handle collateral and such (which can be very tricky to do on your own).

share|improve this answer
add comment

I say to always say yes when asked to loan money to a friend or family member as long as you have the money to do it with. That is the key: having th emoney to do it with. And - don't expect to get it back ever. If you do, great. When you don't, your expectation was met. Although not often, I've lent money to friends and most of the time have been paid back. $10, $300, more. For the times when I was not, I do remember but I don't hold it against the person. Money is only money, after all. Friends are precious and worthy of your aid, support, and respect. If they weren't, then one must ask if they are really a friend. - I have also had to borrow money once for a non-trivial amount. My family, who can easily afford it, refused but a friend helped me at a critical juncture. I offered to make a contract but my friend said no, pay me back when you can. I have tried to start paying back a couple of times but my friend refused telling me to wait until I was more financially stable. - If I am ever lucky enough to be in the position my friend is in, I will emulate this behavior and do the very same thing - and love doing it all the while.

share|improve this answer
add comment

Just so you know, in a small claims court limits are less than $10K so even if you win, you will get just half the money. Hiring an attorney can be expensive.

Never lend money to family or friends unless you don't expect to have it back. Keep the friendship and the money.

share|improve this answer
    
"in a small claims court limits are less than $10K" - this depends on jurisdiction! The post isn't tagged with a location so I don't think you can assume. –  Vicky Sep 22 '11 at 13:14
    
In Alberta, Canada, the limit is $25,000. albertacourts.ab.ca/go/ProvincialCourt/Civil/CivilClaimProcess/… –  ChrisInEdmonton Sep 22 '11 at 13:50
1  
It looks like the OP is in Spain, where the limit is apparently 30,000 Euros: webexpressguide.com/costadelsol/article.php?id=1842 –  Vicky Sep 22 '11 at 14:24
add comment

Aside of "don't lend money to friends" a good idea is to have a written contract that states the sum, the due date, the interest (if any). Having the loan on paper makes it more real and harder to "forget". The third party is not necessary - anyone can have a bank loan for more than $10K by signing a contract with a bank without any third party.

share|improve this answer
    
I suggest, as this person is a friend and you are trying to help them out, that the contract stipulate no interest until the debt becomes past-due. But you will want to specify what happens when it becomes past due. –  ChrisInEdmonton Sep 22 '11 at 13:51
add comment

Money relationships are the opposite of friend relationships. That's why there's so much danger in loaning money to a friend - if the transaction doesn't work out well for one of you, it can destroy the friendship.

Many of the answers here suggest you be prepared for the possibility that your friend will not pay you back. This is called a "gift". Give your friend the money, and trust that they will feel grateful. That gratitude will create generosity, and they will in turn seek to give gifts to you and to others in your circle.

If you're not ready to give money to your friend, then you're better off not doing it.

If you are ready to give money to your friend, then do it without expectation of return.

share|improve this answer
add comment

I tend to group my friends according to the closeness to them. Then when someone asks for money,

  1. real good friend- I will give him money no questions asked and I trust him for his word.
  2. good friend - I will try to just pay him part of it thinking that he will get the other part from someone else. The share of my part will be made to look as if that is all I have. I will learn the reason for his requirement of money, and for genuine cases, I will pay him as much as I can afford and that is payable by him. I will ask him a date for him to pay the cash back.
  3. Others- if they are a known liar or spend cash for useless stuff, you should deny helping them.

Note: if you will require cash later from some one- make a note to help the prospectus money lending friends :)

share|improve this answer
add comment

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.