How to Make a Loan Using a Tax Return As Collateral

Personal loans have destroyed many friendships and relationships. If a friend hits you up for a loan, you may feel a lot safer if they can offer some sort of collateral. Although a tax return may seem like an unlikely source of collateral, this could perhaps be the most reliable in many cases.

Difficulty: Moderately Challenging

Instructions

1. Ask your borrower to bring your his or her tax return from last year and the year before. Also have them bring their most recent pay stub to show their tax withholding. This can give you a fairly clear idea of how big a refund your borrower can expect to receive at the end of the year.

2. Take these documents to an accountant or tax preparer to get an estimation if you are unable to determine the probable size of the refund yourself. Be sure to take any changes in the borrower's income, deductions, and credits into account.

3. Write up a loan agreement that specifies the terms of the loan, including the amount, the rate of interest, and the obligation of the borrower to repay the loan from his or her tax refund. Both of you sign it and have it notarized. Also, have an attorney look it over and declare it legally enforceable.

4. Wait for your borrower to receive the refund. If they have a bank account, have them use direct deposit. This will speed up the process by at least two weeks in most cases. Checks take much longer to process and mail.

5. Hold a piece of collateral from your borrower if you feel it is necessary. For example, if your borrower is in desperate need of $3,000 and can repay it in 60 days from his or her tax refund, then you could hold his or her second car for that amount of time. (This could be particularly motivating for borrowing couples who would have to make do with one car for the duration of the loan.)

References

• IRS website
• Bankrate's web page