Saturday, March 19, 2016

The right way to lend money to family and friends


    While I could give you many first hand accounts of why you probably should never lend money to family and friends I will assume that you have already decided to do so and cannot be talked out of it.

    The first thing you should do is have a serious discussion about why they need to borrow from you.  You will find that it is usually because they cannot get money from anywhere else, or the price of borrowing is just too high.  Does this raise red flags for you?  If you still think they are credit worthy, this conversation should at least start the negotiation / discussion of an appropriate interest rate (it should be high - but if you go above 10% in California you could have a usury problem).

    As alternative you may want to try to find another way to help.  Maybe you can lease a car or truck for them.  If they are starting a business maybe you can help them finance a critical piece of equipment (and then it reverts to you if the business fails or they cannot make payments).

    If you are still going to lend you need to critically discuss their ability to repay the loan and the timeframe.  Discuss cash flows and priorities.  In my experience, an interest only is not a practical solution because it just pushes the problem further down the road and will lead to tension between you and your family member / friend, something we all want to avoid.  Therefore substantial principal reduction needs to be part of the loan, as well as a reasonable exit point where you will be repaid in full.

     Finally, the loan needs to be secured.  That means a Deed of Trust if the security is going to be real property or a UCC Financing Statement or pledge agreement if it is personal property.      

The Tonkovich Law Firm assists clients with Estate Planning, Wills, Trusts, Durable Powers of Attorney, Conservatorship and Contested Probate Procedures and Business and Real Estate Litigation in Irvine, CA as well as El Toro, Aliso Viejo, Lake Forest, Laguna Hills, Tustin, Newport Beach, Santa Ana, Newport Coast, Ladera Ranch, Foothill Ranch, Mission Viejo, Laguna Woods, Corona Del Mar, Silverado, Orange, Laguna Beach, Rancho Santa Margarita amd Fountain Valley in Orange County.

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