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Old 9th June 2011, 11:33   #1
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Question Precautions to be taken when lending money

A friend is starting a new business and is in need of money. Another well-to-do friend of his has agreed to help him.

As the requirement is for a very short period of time, till the former gets the expected cash, the latter is not demanding an interest. However, as the amount is a bit large, they have decided to 'record' the process legally. And create some sort of agreement.

Hence, I would like to know:
  • What is the maximum amount one can lend?.
  • What are the documents that need to make this process recordical and assure that the former WILL have the commitment to the latter?
  • Interest is not collected, but still, can a person do that?
  • What can be done and what be it, if the former fails to pay up?
I assume a check leaf will be needed, and rest what all are required to assure the former pays up?
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Old 9th June 2011, 14:53   #2
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Default Re: What is the process that should be followed while LENDING MONEY.

To the best of my knowledge:

1. There's no limit to how much you can lend
2. As for documents to be taken from the borrower, it entirely depends on the lender. If the lender wants to lend without any documents, the law won't have a problem, nor will it come to the lender's aid in case the borrower defaults. So it's best settled between the two parties. However if the lender wants collateral, it would be a different case.
3. Collecting interest or not collecting it is I guess at the lender's discretion. However if interest is to be collected, there may be certain norms/rules to be followed.
4. If borrower fails to pay, negotiating with him for restructuring the loan (essentially setting up an instalment system that the borrower can stick to), or seeking legal recourse are the two recommended options.

It's best to seek legal opinion on the same, since it's a private lending matter. If the lender wants to safeguard against repayment loss, he should insist on a collateral of the same or higher value. Certain investment instruments such as life insurance policies can be endorsed to the lender. Then there are title deeds to property and so on. If a collateral is being obtained it's best to hire a legal expert to oversee the work and ensure in case the borrower fails to pay, money can be recovered from the sale of the collateral.
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Old 9th June 2011, 19:18   #3
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Default re: Precautions to be taken when lending money

No interest . It's so good to hear of people helping friends in this manner. Even I have never taken a single rupee of interest when giving a loan to a friend / relative.

If your friend wants to be absolutely safe, then ask him to consult with a lawyer. I do the following, and its served me well:

- Loan given via cheque ONLY
- Post-dated (loan due date) cheque taken from the person I'm giving the loan to.
- A simple promisory note identifying both of us and the loan details.

Good luck to him on the new biz! Entrepreneurship rocks.
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Old 9th June 2011, 19:41   #4
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Default re: Precautions to be taken when lending money

There are too many precautions to be taken while lending money wheather small amount or a big amount.
There is no limit on how much you can lend but its important how much you can lend in white.

Regarding document part its safer to lend through an account payee cheque. You should write a seperate agreement showing the reason for lending and other terms and conditions such as repayment time etc.,. Obtain a few blank cheques to ensure the repayment of the loan amount. Dont mention anything abour the blank cheques in the agreement.

Without having a money lending license you cannot charge any interest on the lent amount but if you still want to charge interest you add up the interest on the lent amount for the agreed period and write the total amount as lent amount in the agreement.

If the borrower fails to repay the amount within the specified time you can fill up the cheques and present them for collection with prior advice from a good reputed advocate. Later if the cheque gets bounced you can prosecute the person issuing the cheques.

Its better to take the advice of a good reputed and reliable advocate if the amount is big or else you can follow the above said steps and advance money.

I myself am an advocate and this is the best advice I can give you or your friend.
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Old 9th June 2011, 20:22   #5
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Default re: Precautions to be taken when lending money

Purely my opinion:
- Do not ever lend money to a friend
- If you do, do not expect it back
- If you do want it back, be prepared to lose the friend.
Based on a true-life experience of watching two of my close friends drift apart because of money.
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Old 10th June 2011, 00:22   #6
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Default re: Precautions to be taken when lending money

Surely my opinion,my dads,my grandfathers and noopster ( who made this so easy) :

- Do not ever lend money to a friend, consider it as a gift.
- If you do lend, do not expect it back
- If you do want it back, be prepared to lose the friend. and break your heart.

Based on a true-life ( rather limited ( for me) if I could say so, the extensively experienced grand dad and the even more experienced dad)

Of course none of us has a borrowing history. And I am someone that wouldn't make a friend of mine a business partner, I just cant take the risk of loosing a close relationship. Perhaps its just old me. But nice to know I am not alone!
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Old 10th June 2011, 03:58   #7
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Default re: Precautions to be taken when lending money

Quote:
Originally Posted by noopster View Post
Purely my opinion:
- Do not ever lend money to a friend
- If you do, do not expect it back
- If you do want it back, be prepared to lose the friend.
Based on a true-life experience of watching two of my close friends drift apart because of money.
So WELL said noopster. I'm in the process of losing a 20 year old friend because he's not returning my money and additionally has conveyed to the rest of the group ( my school friends ) that its me who owes him money and not Vice-Versa.


On your second point - Even if he had conveyed once that he's financially tight and would not be able to do so i would have just forgotten the money however on the contrary i see his FB updates consulting if he should buy a new Scorpio or a second hand Pajero


Sorry to say this but i was so annoyed at this that i would not help him even if he's dying.
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Old 10th June 2011, 06:48   #8
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Default re: Precautions to be taken when lending money

Quote:
Originally Posted by harishnayak View Post
i see his FB updates consulting if he should buy a new Scorpio or a second hand Pajero
but you should have replied and said "after returning my money buy the one you can afford"
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Old 10th June 2011, 08:26   #9
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Default re: Precautions to be taken when lending money

@harishnayak- I once lent 5000 to my best friend ( a big amount when in college) and the few weeks till he was able to pay me back were the worst I have ever experienced. But rather than make assumptions I sat him down and explained how I needed to account for the missing money to my Dad and we worked it out. I suggest you do the same with your friend.

In the case of my two friends who were estranged because of money, I really felt helpless: apparently one of them invested 2 lac in a scheme that the other had though of, and that went kaput. Last I heard the friend that had lent was still trying to recover at least the principal but the friend who took the loan claimed he was not in a position to return it (since he lives in a posh house with plenty of cars etc. that is a litle difficult to swallow, must confess). It's a mess and, needless to say, the death of their friendship.

I don't mean you should never borrow money- as GTO said, entrepreneurship is the best and there will come a time when you need money- but please ensure that you draw up a written agreement with the repayment terms clearly drawn up. Emotion and money rarely mix.
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Old 10th June 2011, 09:10   #10
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Default re: Precautions to be taken when lending money

Never borrow money that you cant repay i.e, Borrow money for which you have a clear source of income to return and in a reasonable time period.

Trust me it is equally painful if you really value the friendship and cant return the money you owe on time.

You never know what fate has in store for you. Sometimes even with the best of assumptions and precautions, things can go wrong. If it is a big amount, certain collaterals also in the form of some property documents/ agreement or something can be taken.

Consult a legal expert as it may happen sometimes that you as an individual cannot do(collect) certain things while lending money.
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Old 10th June 2011, 09:20   #11
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Default re: Precautions to be taken when lending money

It is very difficult decision to lend hard earned money to relative/friends. When some plus minus happens, it inversely affects relationship permanently. Such sour relationship very hard to mend.

I suggest, if his friend is lending money and if former is starting business then lender make himself partner(non active) in his friends firm. This way he will be legally safe. He will always had option to take back money and transfer his share to original friend who started business. This is the safest option. All venture capital funding do this. But here if failure happens then both have to share the burden.
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Old 10th June 2011, 10:14   #12
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Default re: Precautions to be taken when lending money

Quote:
Originally Posted by GTO View Post
No interest . It's so good to hear of people helping friends in this manner. Even I have never taken a single rupee of interest when giving a loan to a friend / relative.

If your friend wants to be absolutely safe, then ask him to consult with a lawyer. I do the following, and its served me well:

- Loan given via cheque ONLY
- Post-dated (loan due date) cheque taken from the person I'm giving the loan to.
- A simple promisory note identifying both of us and the loan details.

Good luck to him on the new biz! Entrepreneurship rocks.
I am assuming that God willing you have never had a bad experience in this. Considering you have used only a simple promissory note, have you taken any legal advice whether it is legally enforceable and what are the ways in which one can do so just to keep the record straight between lender and borrower?
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Old 10th June 2011, 10:41   #13
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Default re: Precautions to be taken when lending money

I had lent 10000 Rs about 14 years ago to a close friend of mine because he was short of cash to get married. 10000 rs. 14 years ago was a lot of money (More than a month's pay for me at that time). He had promised me that he will return the money in 3 months. I got the cash back in 2 installments of 5000 each, one after 5 years and another after 10 years. When I received the money back the amount of 5000 had lost its significance for me. I then made sure that I will not give any money to any friend of mine but I do facilitate people by introducing them to banks if they are in desperate need of money.
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Old 10th June 2011, 10:57   #14
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Default re: Precautions to be taken when lending money

I believe lending money for a business is a risky proposition, the business may click or flop miserably. The chances of flop is 90% and business clicking is 10%. Under such a circumstances lending is really risky. Supposing you lend 2.5 lakhs and your friend is confident of returning within 6 months. He invests the money in share market or in land dealing. The investment is bound to suffer if the economy is down. This is what i suffered. So the money comes back to you in instalments, which will not be of much use. Secondly it might spoil your friendship if you don t get it when you require and finally it will leave a bitter after taste.
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Old 10th June 2011, 13:42   #15
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Default Re: Precautions to be taken when lending money

Thanks guys for the precautionary advise. As for lending money, as long the relationship is true, I believe there should be NO problem.

Quote:
Originally Posted by noopster View Post
Purely my opinion:
- Do not ever lend money to a friend
Quote:
Originally Posted by YaeJay View Post
Surely my opinion,my dads,my grandfathers and noopster
Quote:
Originally Posted by harishnayak View Post
So WELL said noopster. I'm in the process of losing a 20 year old friend because he's not returning my money and additionally has conveyed to the rest of the group ( my school friends ) that its me who owes him money and not Vice-Versa.
I'm sorry guys, it might be because I spent most of my days in a rural place and not have had the level of exposure to life, butttttt..... I CANNOT accept the above statements. You just have to 'read' the person well. As for me, "A friend in need, is a friend indeed".

Well, harishnayak, IMO, you should be happy to loose such an inconsiderate friend, and be thankful that atleast now he has shown his true colors. I'm surprised that you could not understand him well in the past 20 years.
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