Social Lending

What to Consider When Friends or Family Ask to Borrow

"Social lending"—transactions between friends, family and business associates—accounted for somewhere in the range of seven million to 10 million person-to-person loans in the U.S. in 2007. With banks tightening lending standards, those numbers are likely to increase.

In the best-case scenario, a loan between friends or family members is mutually beneficial. In many cases, however, the transaction leads to an unpaid debt and a strained—or even broken—relationship.

If you aren't in a financial position to make a loan, you needn't worry about the consequences. If you're flush, there are a number of things to consider before responding to your friend or family member's request. These include what your borrower's credit rating is, the likelihood you'll be repaid, and how you would be affected—financially and emotionally—if you never got your money back.

If you decide to make the loan, experts say you greatly improve your odds of coming out of the transaction with your relationship intact if you are clear about your expectations. Outline all terms and conditions—interest rate, payment amount and schedule, late payment fee, and what happens if the borrower doesn't pay up, for example—and put them in writing.

A notarized promissory note, a security agreement, and a mortgage or deed-of-trust all are documents that can help protect you when lending money. The more complex your arrangement becomes, the more you may benefit from outside assistance, such as an attorney.

Despite all your precautions, lending money is always a gamble. And when the borrower is a friend or relative, you've got much more to lose than just the loan balance. If saying no isn't an option, enter into the transaction with as much clarity as possible.

It's our business at HUECU—and in everyone's best interest—to make responsible loans. Remember, if the pros turn down your borrower, there likely is a very good reason. Call us at 617-495-4460. Maybe we can help your would-be borrower and take you off the hook.