Wednesday, July 7, 2010

Lend money to a friend

Dear Mr Tan,

One of my very close friend has seek to me on lending him $5000. I have agreed to help him on this. but i have not pass him the money yet. even though he is a very close friend of mine, i still do have a concern on if i can get back my money as i have experience lending someone money and unable to collect it back.

Is IOU a proper documentation to ensure if i can get back my money if anything goes wrong ? If IOU can be used, what kind of format would I have to draft out ? Is there any other proper documentation that I can use to ensure i can take back my money ?

REPLY
Here are my views:
1. If possible, avoid lending money to a friend.
2. If you have to lend money, be prepared that it will not be returned
3. Have a document (e.g. IOU) to acknowledge that the money has been passed. Write down details of the repayment.
4. Ask for monthly payment of interets or interest plus principal. This ensures the discipline of repaying back the money.
5. Here is another alternative. Ask your friend to borrow the money from a cooperative society, with you acting as guarantor. If the borrower does not pay, you will have to pay as guarantor. But the lender will try to collect from the borrower first. This is still risky to you, but you do not have the hassle of chasing for repayment.