How to Lend Money

If you watch court shows on TV, you already know what can happen when you lend a friend or family member money. Money problems can end longstanding friendships and break up families. However, the following few precautions can help you avoid small claims court--or Judge Judy's court.

Instructions

Difficulty: Moderately Challenging

Things You’ll Need:

• Access to a notary public (check with your bank)
• Receipt book

1. Lend only as much money as you can afford to give away. Imagine that your friend or family member never repays the loan; if you can't accept this, say no to the loan.
2. Get the money from your checking or savings account. Never borrow money to lend to someone else. A cash advance on your credit card may cost you 20 percent interest or more, and you may not be able to enforce a similar interest rate for your friend or family member. Don't borrow from your own home's equity or retirement plan if the person asking for the money has his own home and retirement plan.
3. Avoid any talk about investing in your friend or family member's business venture. If the business is successful, she may simply repay you and keep all future profits; if it fails, she will point out that an investor shares the risk of the business.
4. Get something in writing. Ask your friend or family member to get a notarized letter stating how much is being borrowed and when you can expect to be repaid. Never let the borrower state that you'll be repaid when the borrower is able--if the borrower is never able to repay you, you can't sue for your money.
5. Write receipts for each payment made in cash. Remind the borrower that if there is ever a miscommunication about how much has been repaid, the borrower will need the receipts.
6. Take care when accepting checks. Never accept a check that has the words "paid in full" on it unless it repays the debt in full. If you cash a check that says "paid in full," the debt is considered repaid.
7. Write an addendum to your agreement if you change the conditions of the loan. A written contract between two people cannot be changed except in writing.
8. Stop lending money to someone who has failed to repay a previous loan. After a while, it is assumed that you no longer expected repayment and therefore weren't making additional loans but simply giving your friend or family member money.
9. Sue or forgive. If the amount you want repaid is within the limit for small claims, you won't need a lawyer to file a suit against the borrower. You may be better off suing for part of the money in small claims rather than going to the trouble of going to another court. First, ask yourself if the damage to your relationship with the borrower is worth the money you are asking for.

Tips & Warnings

• If you want to lend money to a friend or relative but fear your relationship with the borrower may tempt him to fail to repay, give the money to a third party and ask that person to make the loan. Don't tell your friend or family member that the money really comes from you.
• If you make a loan by check, write to the order of the borrower's creditor so it doesn't get used for something else.
• Charging a high interest rate for a loan is called usury and is a crime.