The wise say no one is an island. But what does this mean? It is simple, live long, and at one point you will seriously need help. This is, especially the case when it comes to financial matters. There are different conditions that can compel a friend to ask for financial help. For instance, one may be plagued with an unexpected medical bill. Sometimes it can take longer to apply for a personal loan and get the needed funds. A payday loan could be handy where funds are urgently needed. But is it the best choice? Not at all. The reason why we often refer to them as predatory lending is, they practically ruin your financial life. The fact that a friend has approached is an indication of how dependable you are.
I can tell you there is nothing good in your social life, like being a pillar of strength to others. But the question is, on what terms should you be lending money, especially to family members and friends? Many will advise you not to include friendship or family relationship on money issues. This is because you may end up damaging your relationship. There are also cases where individuals have failed to repay the borrowed money. So, what can you do individually? Well, do not deny others the good they deserve if you are in a position to help. Lend money legally. How can you do that? We are going to discuss three components involved in lending money legally; negotiating loan terms, legalizing the loan, and collection of payments. Let us begin right away!
Negotiate the lending terms
To avoid misunderstandings, it is good to spell out terms right from the beginning. It is important to establish the terms under which you are lending and let the borrower also know before accepting the offer. Here are the important points for consideration.
- Understand what the borrower wants. You should talk to the borrower to know exactly what he or she wants. Ask critical questions such as the reasons why they do not prefer loans from banks and other financial institutions. In general, you are likely to be approached by individuals with bad credit, though some traditional lenders approve loans even to individuals with bad credit. What is more, assess the borrowers’ ability to repay the borrowed amount. The best way to test their ability to repay is to look at the jobs they do and how much they earn. Also, look at other debts they owe because this affects their income and their ability to repay.
- Determine how much you want to lend. You don’t have to lend exactly what is asked for. I don’t mean you should lend more than what the borrower request. If they want to acquire something and quote a certain value, ask for more details about the item they want to acquire. There are cases where people borrow more than what they actually require. You are the one to determine how much you are willing to lend and never should you give an amount that irritates you. Never lend an amount more than what you can think of losing.
- Chose a sound interest rate. It is good to charge interest, and it doesn’t matter if the person you are lending to. Paying interest indicates the seriousness borrowers put into loan repayment. Charge reasonably. Do not make it unaffordable. Look for the maximum amount allowed as interest in your jurisdiction and let that guide you.
- Draft the repayment schedule. This schedule should be based on the amount of the loan and range from months to a few years. If the loan period is long, the borrower will be paying less each month, though the amount will be more with interest. The payments should be equal each month.
- Determine the fees on late payments. The borrower should repay the loan as agreed. The best way to ensure this is done to set the late fees.
- Ask for security. A loan with security is safer compared to an unsecured one.
Make it Legal
This is a very important aspect of the lending process. How do you make the loan legal? Well, consider the following.
- Use forms and templates. Use the templates online to draft your contract that will help you in case the borrower defaults. In case the borrowed amount is large, look for a lawyer to help you draft the contract.
- Include material information about the loan. The title of the document should be “promissory note” and should include the following information:
- The loan amounts
- The date issued
- Your name
- The name of the borrower
- Incorporate the agreement to repay. The borrower should make a promise to repay the loan. A contract cannot be legal without this promise. Quote his words in the document.
- Describe the repayment process. Show how regular the borrower will repay the loan, including the interest rate.
- Explain what happens in case the borrower misses a payment. Ensure there is a penalty for late payment and let the borrower understand that.
- Incorporate security agreement. If there is security, ensure you include it in the agreement. Make sure there are sufficient details regarding the property, and the borrower should state that he or she is granting security in the particular asset.
- Sign the agreement and distribute copies. Do not give out funds unless the document. Make sure there are witnesses as the two of you sign the contract. Keep the original and give the borrower a copy.
Collection of the Payments
You have now made the lending legal. But the process is incomplete unless you make collections. So, what’s next? Monitor the repayments and make all the records and the dates of each payment. Once you receive the payment, notify the borrower. In case any payment is late, call the borrower and inquire what could be going on. There could be a problem, and it is only good that you find out.
Additionally, you should always deliver past-due notices. Document the missed payments for the purpose of protecting yourself. In case security was attached to the loan, demand for it. If it is sent to you, go for it. I don’t mean you should be violent. Sue the borrower if he or she fails to repay the loan.
The Bottom Line
The lending decision is very critical. To avoid losing your money, lend legally. We have discussed how you can do that. Follow these directions, and you will always be on the safer side. In case the lender faces a difficult condition that prevents him from making a payment, some licensed money lender in Singapore can consider re-adjusting the payment schedule, even if that can be done at a cost.