It’s hard to decide what to do when you have such reservations. The decision is made more difficult when the amount requested is considered large by your standards.
Here are five key areas to consider before you break open your bank.
1. Will you have regrets?
• You have reservations, or
• Giving out the loan is making you feel guilty (the asker is begging for help).
It’s better to find out someone’s true character before any money changes hands.
2. Accept the possibility of bad debts
Accept the possibility of the loan becoming a bad debt and don’t lose sleep over it.
In other words, the loan amount you give should be what you can afford to lose – it won’t cause you hardship or change your current lifestyle.
You can’t predict future events. The borrower may have gone on to get a further loan from an illegal moneylender. Illegal moneylenders may not be professional in dealing with defaulters. If that is the case, the borrower’s new priority of repayment is to the moneylenders and not to you.
There must be mutual agreement on the expectation and affordability of repayment. This will help prevent disputes and avoid the “I-thought-we-were-on-the-same-page” situations. It will also confirm that the money is not a gift but a loan that must be repaid.
4. Get commitment in writing
A loan document (handwritten or electronic) will make sure there is a commitment from the borrower. There should not be any doubt after the execution of the loan document. Any dispute or misunderstanding can be resolved by referring to the loan document.
A simple promissory note will suffice without hiring the services of a solicitor. It should contain the following information:
• Agreement date;
• Collateral (if any); and
• Witness (optional but recommended).
5. Be strict about collections
Don’t let late payments pass without sending reminders (calls/letters).
Strict compliance with the terms of the promissory note is a must. The lender must take immediate action for any non-compliance especially the payment due date.
Send the necessary reminder letters and phone calls. If it’s not too inconvenient, pay a visit. If all else fails, the last resort is taking legal action.