Lending money to a friend is a dangerous business that should be avoided whenever possible. Unfortunately, at some point, a friend may approach you for a loan and you will be forced into a difficult situation whether to lend or not. Before handing over money, think carefully about whether you should do so. If you decide to make a loan, you must document the transaction so that it can be legally accounted for, and don't be afraid to remind the borrower about the money that was borrowed from you. When it's time, take legal steps to get your money back.
Step
Part 1 of 4: Deciding whether to lend money or not
Step 1. Decide whether you are willing to lend money or not
You are under no obligation to lend money to anyone, and many friendships end because of unpaid loans. Therefore, think carefully about whether you are willing to lend money or not, especially if the loan amount is large.
- Avoid lending money to friends who tend to be irresponsible when it comes to money. You may value your friendship, but that doesn't mean that person is a good borrower.
- If your friend only needs a few thousand rupiah to pay for lunch, don't think too much about it. Maybe you need to borrow the money later. A few thousand dollars here and there between friends shouldn't be a big deal, even if they are important to you.
- If he needs a few million rupiah to pay off the rent for the apartment his family occupies because he recently lost his job, he's probably borrowing it out of desperation and will do his best to pay it off. On the other hand, if he borrows ten million rupiah to go out with his new girlfriend to Las Vegas, then you should reconsider the character of that friend.
Step 2. Determine how important the money is to be repaid
When lending money to a friend (or anyone else, for that matter), there's always a risk that he won't or won't be able to repay it. Therefore, before deciding to lend money, think about how it will affect you if you never get the money back.
- If the borrower is the closest and most trusted friend and the loan value is small, for example around 300 thousand rupiah, it probably won't cause much trouble if he can't pay it off. On the other hand, lending 100 million can be very detrimental to your relationship and financial health.
- Remember that you should never lend more money than you can afford to give up. If you can't meet your own financial obligations if your friend doesn't pay off on time, you shouldn't lend the money.
Step 3. Treat the loan as a gift
If the borrower is a very important friend to you, it may be wise to consider this loan as a gift. If you feel that he won't pay off, but wants to lend him the money, then just tell yourself that this loan is a gift. This step will help you hold back your anger if he doesn't pay off.
You can still tell the friend that the money is a loan, and that he should pay it back whenever he can. However, in reality, understand that you may never receive the money again. In most cases, this may not be the best way. However, if that friend is more important to you than the amount of money, then this is one way to look at the loan
Step 4. Discuss the loan with your friends
Before giving a loan, you should discuss the loan with your friends, especially if the amount is large. You have a right to know what the loan will be used for, and why he doesn't have the money. Make it clear that you don't want money to ruin a friendship. So, it's best to talk about how to repay the loan.
- Be honest in your discussions. Say that you want to help as much as you can, but that you also have to take care of yourself. Point out that you need to stay in touch, and that if there's a problem paying off debt, he should talk to you rather than walk away.
- If you feel too embarrassed to come out about this matter, let your spouse/lawyer/accountant explain all of this to protect your own financial interests.
- Ask him why he doesn't seek a loan from a professional lender. If the loan amount is very large, it's certainly not a problem for you to ask this when considering the decision. Maybe he has a good reason, or maybe he doesn't, but either way, this is important information you should consider.
Step 5. Don't be afraid to say "No"
In some cases, you may not be able to lend money or you may not be willing. Whatever the reason, say "no" if necessary. If the reason for your reluctance to lend money is because you think he won't pay it back, but you want to keep the relationship, it's a good idea to give a different reason why you don't want to lend the money.
- For example, you might say, "As a personal rule, I don't lend money to friends. It's not that I don't want to help, but I've lost a lot of friends to money, and I don't want to lose you."
- If he continues to insist and you don't know what else to say, let him know that you should go home and check on your finances. Then, send a message that says, "I'm sorry, I'd love to help you, but lending you money is simply not my way. Is there any other way I can help you?"
Part 2 of 4: Authorizing Transactions
Step 1. Make a contract
You should create a document outlining the terms of the loan, especially if the loan is a large amount (the meaning of "big" depends on your perception). This document will explain who is lending the money, and to whom, how much money is being lent, when the borrower is expected to start paying off the loan, and when everything is due. The document must also include interest that must be repaid.
- Understand that this document will primarily protect you if the friend refuses to pay. However, this document also aims to make the terms of the loan clear and explicit, which hopefully will help avoid disputes.
- Remember to ask the borrower to put a signature and date on the document because if it is not signed, this document cannot be accounted for.
Step 2. Ensure that the document is legally accountable
To be legally approved, the document must include the following information:
- Must be a written document signed by the borrower. You, as the lender, may also need to sign paperwork, but you don't have to.
- The document must promise payment of money.
- The document must state a fixed amount of money (with or without interest).
- There must be a definite time when the money is repaid.
- The money must be paid to the owner. As a money lender, and document holder, you are the owner of the money.
- Documents must relate only to the money to be paid. This means that no other actions are included in the document.
Step 3. Include a repayment plan
In the document, you should describe when the loan will begin to be repaid, and when your friend must pay off in full. Make sure you include the expected interest, as well as the consequences if payment is not received on time.
- For example, if you lend $5 million on February 1, you may need to outline a plan stating that the borrower will start paying off April 1 in $1 million per month in installments and 0.5% interest on on-time or early payments. and 5.0% for late payments. Details that the last payment must be received no later than August 1 of the same year.
- You don't need to create this payment plan alone. You can work with a friend who is borrowing money, but make sure you include all the details in writing.
- The imposition of interest is not mandatory.
Step 4. Validate the loan documents before a notary
Notarizing documents before a notary is important because it requires a third party to verify that the people who signed the document are real people. This is important because your friend will not be able to accuse you of forging a signature because it has been certified before a notary. This step will usually require that you both go to a notary public (banks generally have a public notary on staff, but lawyers can also certify documents) with two photo IDs, and the documents will be notarized before a notary.
- However, the notary does not provide legal advice, and certifying the document in front of a notary also does not imply that the people who signed the document understood what was in the document.
- Doing all these things seems like a hassle, but it's for your own protection. If he tells you that you are not a good friend for making him go through all this, you should think about the loan again, because a good friend will understand that you only care about your own well-being.
- Keep the originals for yourself, and make copies for your friends so that both parties can refer back to them if necessary.
Part 3 of 4: Requesting Repayment
Step 1. Remind yourself that you are entitled to the money you lend
If your friend doesn't pay off on schedule, then it's time for you to take action. However, before resorting to legal action, you should try to talk to him. Maybe there's a certain reason why he hasn't paid off, or maybe he just forgot. Sometimes people feel bad about bringing up a topic like this, but in this case, you shouldn't be.
Remember that it is your money that you receive. Your friend thinks you can ask him for it, so you can ask him back
Step 2. Call or write an email to see what's going on
The first time you call him to ask why he's not paying off the debt, try to be light and easy-going. Explain that you're not accusing him of avoiding payment, but that you're concerned about his well-being, and want to help out in any way possible.
- For example, you could say something like, "I just wanted to make a quick call/email to see how you're doing. I saw on my calendar that you should have sent the payment yesterday, but there's nothing in my account. Is everything okay?"
- Contacting the borrower in a very offensive way will immediately put him on the defensive. If you call and say, "You owe me money and don't pay it off on time, what's the matter?", you'll sound angry and seem like you've assumed he'll never pay it off.
Step 3. Try to understand the situation first
If the borrower is a friend you've known for a long time, and you really trust him, it's okay to give him a little wiggle room, if you like. If you call him, and he explains that he didn't forget the payment but that his son has a broken arm and he needs the money to pay for the doctor, but he can pay you off next week, it might be wise to have a good attitude towards him.
Being kind is for the sake of your friendship. However, if the borrower is a friend you don't trust, or he doesn't seem to feel guilty or concerned about late payments, then there's no reason to believe that
Step 4. Warn him about what will happen if he doesn't pay off
If your friend keeps avoiding you, tell them what will happen if they don't pay off. This doesn't mean you have to threaten him with violence, but rather, you shouldn't give up on getting paid off. For example, explain that if he doesn't pay off, you'll never be able to lend him any more money.
- You can also explain how his failure to comply with the agreement on his part has seriously damaged your trust in him, and that you don't feel like being friends with someone you can't trust.
- Also remind that you have a written agreement. So, not only can you break the friendship, but you can also take him to court if you want.
Step 5. Start by sending a late due notice
If you think that you will eventually have to take your friend to court, you should create a paperwork trail. Therefore, submitting late due notices in writing after 30 days, 60 days, and 90 days will help you determine what happens if legal action is taken.
- Make sure you keep a copy of the loan document and send it by seal so your friend can't deny that he never received it.
- State the terms of the loan in the letter and when he should pay you.
Step 6. Inform that you will take legal action
If your friend continues to avoid repayment, it may be time to act tough, especially if you don't believe the reasons she's giving about why she hasn't paid off the debt. Contact him again, either by email, phone, or in person. Calmly communicate that you don't want this, but that if he can't pay off the debt by a certain time, you'll be taking legal action.
Understand that this step might offend your friend, and you risk ruining the friendship. However, if you value money more than just friendship, this step is necessary
Part 4 of 4: Taking Legal Action
Step 1. Decide if getting money back is more important than friendship
If you've been trying to get your friend's money back by talking to them in person, but they don't seem to be paying off, you have two options. You can simply give up and convince yourself that the money is a gift, or you can take legal steps to get the money back. However, if you decide to take legal action, be aware that your friendship will likely end.
- Depending on the size of the loan, you may need to take legal action (assuming you've taken the steps to deal with this possibility when you make the loan) even if doing so will damage your friendship. Someone who borrows a large amount of money, and doesn't care enough to pay it off is not your friend.
- Understand that money you give as a "gift" to a friend is not tax deductible. So you can't claim it as a tax deduction. You may actually be subject to gift tax if the amount matches the taxable amount.
Step 2. Prepare your document
It's a good idea to take steps to protect yourself from this incident. For example, say you already have a notarized document that is signed and states that you lent your friend money and that he should pay it off by a certain date. If you don't have these documents, you may still be able to take them to court because oral contracts are considered binding. The problem is, the existence of an oral contract is very difficult to prove.
- If you have an oral contract, you may be able to prove the existence of such a contract with witnesses.
- Collect all the messages you may have sent asking for loan repayment. This will create a document trace, which will indicate that you have tried to resolve the issue by other means.
Step 3. Hire a lawyer
At this point, you will need to hire an attorney who will guide you through the process of bringing your friend to court. Lawyers may start by sending a formal letter to your friend asking for the debt to be paid off and if it's not repaid, be prepared to settle the matter in court.
- Sometimes, a formal letter like this will be enough to motivate your friend to start paying off the debt.
- Be aware that hiring a lawyer is not free. You have to pay for their services. So, make sure that the money you will get is greater than the amount of money you have to pay to hire a lawyer. Otherwise, although you may get the money back, you may lose some money or just break even, depending on the amount of money involved and the attorney's services.
Step 4. Resolve the dispute in a lower court
It's best if you take the matter to a lower court, unless you've lent a very large amount of money. If you have hired a lawyer, they will guide you through the filing process. If you haven't already, you'll need to contact the county clerk where you live (or where your agreement was signed) because lawsuits vary from country to country.
- In most cases, you'll need to sign an affidavit confirming that you've tried to resolve the matter out of court, fill out a complaint form, asking for details of the claim, and pay a registration fee, which usually ranges from $100,000 to $1 million, depending on where you live.
- At this point, you should send a "lawsuit" to the defendant (your friend). You can do this yourself, through an attorney, or by hiring a private company that will "take care" of the defendant.
- If your friend continues to evade repayment, you will usually be asked to both appear before a judge who will determine what action to take. Keep in mind that if your friend decides to pay off their debt within this time, it's your responsibility to notify the court.
Tips
- If your friend doesn't pay off the debt as promised, and you can't get in touch with him, there's a good chance he's avoiding you because he's embarrassed or has no way of paying it off. In this case, it's a good idea to let him know by voicemail or email that if you can't reach him by a certain date, you'll be forced to take legal action. Explain that if he calls back, you'd be willing to listen to the reasons why he couldn't be reached, but that you need to get your money back as soon as possible.
- If a friend approaches you for a large loan, it may be because he or she doesn't have the credit score needed to get a loan from the bank. While there may be a strong reason for the credit shortfall, a low credit score is an indication that he has not been able to fulfill his previous repayment promises.
Warning
- In general, lending money to a friend is a bad idea. If the friend doesn't pay it off, you'll lose money as well as a friend. Giving away a (small) portion of the money needed is a great alternative to a loan.
- If you're in a formal relationship, make sure you talk about the loan with your partner before giving it away. Your spouse may be disappointed if you lend the entire savings account to a friend without first discussing it, and if the money is not paid off, he or she may never let you forget it.
