Lending money to a friend or family member for a personal loan can lead to a headache if you do not take the proper precautions and steps to ensure that the loan is repaid. All financial institutions require borrowers to complete a loan application. As part of the loan application, borrowers must submit additional documentation to ensure that the borrower has the means to repay the loan.
Follow These Best Practices
As a private lender, you should protect yourself and ensure you have legal recourse if the borrower defaults on the loan. Requiring the borrower to provide you with documentation showing you their assets, debts, and ability to repay the loan is a good practice to protect yourself. Even if you know the borrower, ensure you obtain a copy of their proof of identity, a driver’s license, identification card, or passport will suffice. Ensure that the proof of identity is not expired and that you have the borrower’s current residential address.
Require the borrower to submit the last four pay stubs and their W-2 statements and most recent tax returns. By looking at their income, you will be able to verify that the borrower can repay the note and setup repayment terms and conditions that will be suitable and not cause the borrower to default.
Require the borrower to provide you with their current employment information and do your homework by calling the employer to verify employment. An employer will not answer specific questions about the borrower’s work ethic, hours, or personnel file. However, the employer can confirm that the borrower is employed.
Lastly, require the borrower to provide bank statements for checking and savings accounts as well as any investment accounts they may have. In doing so, you will not only get an idea of the borrower’s spending habits, but you will also gain insight into other assets you may be able to use as collateral in the event the borrower defaults on the note.
Make a Determination
It is important that you retain a copy of all documentation submitted in support of the loan application. Additionally, once you do decide to lend the money to the borrower, ensure that the terms and conditions of the note set forth the requirements for repayment, default consequences, and legal ramifications in the event of default. Keep in mind that pursuing a borrower for default can be a costly legal endeavor, therefore, you should consider adding language that would require the borrower to repay any legal fees you incur as a result of any default.
Before lending any money, please consult with us to ensure the loan contract is legally binding and protects you in the event the borrower does not fulfill their obligations and fails to repay the money.
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