Are you lending to a friend or relative?

(Disclosure: This blog post is sponsored by Credit Sudhaar)

Neither a borrower, nor a lender be!” advises an old English idiom, but what do you do if a friend or relative asks you lend money instead of opting for an easy personal loan or any other form of credit? 35 year old Mikesh Chawla found himself in a similar situation a couple of years back when his first cousin Akhilesh asked for a loan of Rs 1 lakh to aid him with his attempt at setting up his own spare parts business in Punjab. Akhilesh assured Mikesh that he had arranged for the rest of the funds and this would only be a bridge loan that he would return in a year.

Having grown up in a joint family with Akhilesh, Mikesh lent him the money in good faith though somewhere at the back of his mind he knew it was not probably the best idea as Akhilesh though enthusiastic was skittish by nature that had led to a couple of failed ventures earlier. However Mikesh let his heart prevail over his sense of logic and lent Akhilesh the money. It’s been two years hence and Akhilesh has once again lost the money as he claims he was “duped” by a supplier. With this turn of events between Akhilesh and Mikesh, relationships between them and even their fathers have gone sour.

This situation could however be avoided only if Mikesh had followed certain ground rules instead of just lending the money on the basis of an informal verbal contract. Here are certain ground rules you can follow to avoid falling into a similar situation like Mikesh.

Get full details of the plan

When you are lending money to a friend or a close relative, he will specify the reason why he needs the loan. Instead of getting a sketchy idea or an overview of what he intends to do with the money, ask for full details. For instance, Mikesh should have asked for a business plan for the spare parts business that Akhilesh proposed and gotten full details of supplier and supply chain management and should have tried to whet it on his own. If the friend or relative tends to get offended by the details or takes it personally, it should serve as a red flag to you.

Check credit profile

While you as an individual cannot access the CIBIL report of a friend or relative you can always ask him to provide you a copy of his CIBIL report. His CIBIL score and CIBIL report will give you an exact idea of how responsible the person is with his credit handling and if he has been making an attempt to improve his CIBIL score by making timely repayments. This will tell you whether he is equipped to repay the loan on time. While it may seem far-fetched and you may be accused of behaving like a bank or any other lending institution, you wouldrather take the blame of acting tough than losing the money at a later date! Mikesh for instance would have confirmed his suspicions had he gone through Akhilesh’s CIBIL report that shows that Akhileshwas onpersonal loan defaulter list earlier.

Discuss repayment terms and worst case scenario

While this is an admittedly awkward discussion to have with a close friend or relative, it is better to discuss terms of repayment, such as the principal, the interest if you wish to charge any and worst case scenarios such as late payment or non-paymentas in case of Akhilesh. You could discuss things like a late charge or even the possibility of a legal action in case of non-payment. While this may lead to some hurt feelings it will eliminate any nasty surprises later. Had Mikesh and Akhilesh had such a discussion there would perhaps not been a day like this when both families who shared almost everything do not see eye to eye today.

Get it in writing

This again may seem far-fetched when you are lending to someone close to you, but it is indeed better to keep a record in black and white rather than entering into a verbal contract. If you wish to keep things simple, have things written on a promissory note on a stamp paper and get the document notarised. Make sure that the agreement is drafted clearly and put out the clauses of repayment. It is recommended that you carry out the transaction via cheque so that it serves as a record as well. The promissory note should also bear details of this cheque. Names and address proofs too should be mentioned correctly in this agreement.

If your friend seems to be taking offence at your suggestions, and if you are even the slightest bit uncomfortable about the lender-borrower relationship consider declining the request. While these may cause anger and hurt in short term it may save your relationship in the long term as your friend ore relative may someday understand your side of the story. Be truthful about your intention and offer service based assistance if you can.

On the other hand, if you have decided to part with your money and give the loan, distance yourself and do not try to micromanage the spending pattern of your loved one. Mikesh and Akhilesh are a classic case of what not to do while lending to someone close and we hope these tips will come in handy if a similar situation arises in your life.

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