LOANS: THE ESSENTIAL GUIDE TO LEND MONEY

STEPS TO TAKE BEFORE LENDING MONEY

• Only Lend to People You Trust: Lending money is risky, so it’s best to lend only to people you trust. Trust can be based on personal experiences or the opinions of mutual friends. However, even with trust, consider the impact a loan might have on your relationship if things go wrong. Visit here for moneylender in Singapore

• Make Sure It’s Not Seen as a Gift: When you lend money, make it clear that it’s a loan, not a gift. This helps avoid misunderstandings and tax issues, as gifts above $15,000 may be subject to gift tax in the U.S. Making this distinction clear can help protect both your finances and your relationship with the borrower.

• Review the Borrower’s Finances: Ask to see the borrower’s financial statements if you’re unsure about their ability to repay. This can include a list of their assets (like savings) and liabilities (like debts). Reviewing their financial stability can help you decide if lending to them is a smart choice.

• Only Lend What You Can Afford to Lose: Lend only as much as you’re comfortable losing, even in the worst-case scenario. Avoid dipping into your savings or taking out loans to help others. If the borrower needs more than you can provide, it’s okay to decline or suggest they seek other funding options.

USING DOCUMENTS TO PROTECT YOUR LOAN

• Use a Written Loan Agreement or Promissory Note: A written Loan Agreement clearly states the loan terms and protects both parties. It includes details like the loan amount, interest rate, repayment plan, and penalties for late payments. If you don’t want a formal contract, a Promissory Note is a simpler option that still legally binds the borrower to repay you.

• Consider Charging Interest: Charging interest can help avoid tax complications, especially for larger loans. The IRS expects interest on personal loans over $10,000, and they provide an Applicable Federal Rate (AFR) as a minimum suggested rate. By following the AFR, you avoid possible tax issues related to interest-free loans.

• Set Up a Repayment Schedule: Agreeing on a repayment plan is key to getting repaid on time. You can ask for regular payments, like monthly installments, or a single payment by a set date. A clear schedule helps both you and the borrower stay on track, and you can even include penalties for late payments to encourage timely repayment.

COLLECTING THE DEBT IF THE BORROWER CAN’T PAY

• Send a Demand Letter: If the borrower fails to repay, you can send a Demand Letter, a formal request asking for payment by a specific date. This letter usually mentions possible legal action if payment isn’t made, which can encourage the borrower to comply. Attach the Loan Agreement or Promissory Note to remind the borrower of their obligation.

• File a Claim in Small Claims Court: If the borrower still doesn’t pay after receiving the Demand Letter, small claims court might be an option. The claim limits vary by state, typically between $2,500 and $15,000. Small claims court is simpler than other courts, and legal representation is often unnecessary, though allowed in some states.