A New Year's Resolution When Someone Asks to Borrow Money from You

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Seven ideas for avoiding unpleasant situations this new year by friends and family members who wish to borrow money.

A recent Federal Reserve survey claims that about 10% of Americans have loans that have been extended to friends and family. These loans total a whopping $89 billion and feature a double-digit default rate of 14%, versus just 1% for those who borrow from a bank. According to real estate broker Bob Boog, author of Selling Homes 1-2-3, more and more people are being pressured to help finance a family member's home purchase. Due to the sky-high default rate, and to help avoid a potentially unpleasant situation; this year, before grabbing a checkbook and doling out dollars, make it a resolution to consider these seven ideas:

1. Don’t commit right away. It has been said that “quick to borrow is always slow to pay”. So while it's natural to show compassion for the friend or family member, tell them you would like to help, but explain that it's necessary to review your financial situation before making a decision. Oftentimes solutions can be found in the meantime, and the rich benefactor is no longer needed.

2. Just say “no”. Blurting out a blunt “no” can feel good but sometimes make matters worse. Consider the amount requested, and provide a logical explanation that will not damage the relationship. Perhaps a more favorable solution can be found that doesn't involve financial aid?

3. Make a counter-proposal. A smaller amount as a gift, with no expectations of repayment allows one to be generous and removes the potentially heated issue of non-repayment.

4. Set clear expectations. When loaning money, set specific goals, timelines and clear expectations. Don't beat around the bush about when and where to expect payment. Be very specific about the term of the loan, interest rate, payment plan, even the penalty that will be incurred should a payment be missed.

5. Specify all terms in writing. Statistics claim that 7 out of 10 personal loans are not put in writing, which may help explain the high default rate. Having a written agreement reinforces the repayment terms discussed, and prevents any potential misunderstandings. Promissory notes and contract forms can be purchased online at http://www.nolo.com for approximately $10.

6. Issue Receipts and Written Reminders. Keep track of the payments received by issuing receipts and written reminders. If tracking the payments and issuing receipts is too cumbersome, visit http://www.circlelending.com. For a modest fee, Circle Lending will track the transactions and issue year-end tax statements.

7. Consult with a CPA. If the loan is in excess of $10,000 or the money will finance income producing activities, the IRS will expect a certain amount of interest to be charged. To find the current rates, visit http://www.irs.gov and search for AFR (Applicable Federal Rates). Or, contact a trusted CPA for advice.

Sometimes an extenuating circumstance makes it near impossible to avoid lending funds to a friend or family member. But when it comes to lending money, it is wise to cover your assets. After all it’s your hard earned funds that are at risk. So this year, if put under the pressure to lend money, resolve to use these seven ideas. It may help everyone stay on friendlier terms, and avoid the nonrepayment blues. Happy New Year!

Bob Boog is a licensed real estate broker and author of Selling Homes 1-2-3. His most recent book is: Finding Killer Real Estate Deals: Proven Insider Secrets for Investors, Real Estate Agents and Bargain Hunters Like You

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