Neither A Borrower Nor A Lender Be

Mar 4th, 2009 – Comment

Dear Lou, One of my friends is buying a medical business and asked me to lend him some money for 2 months with reasonable interest. It’s tempting and though I’d like to take advantage of this offer, at the same time I am scared as I’ve never done it before. I don’t have much money, […]


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Dear Lou,

One of my friends is buying a medical business and asked me to lend him some money for 2 months with reasonable interest. It’s tempting and though I’d like to take advantage of this offer, at the same time I am scared as I’ve never done it before.

I don’t have much money, so I have to use my savings for emergency needs.  Are there any legal regulations to do this? If there is a third party to be involved (lawyers, etc.) that could give me some confidence that no matter what I won’t lose my money, I will gladly go for that.

Thank you!

Ashot

Hi Ashot,

I have never advised lending money to friends and family. Sure a twenty or a hundred here or there but no more than that. My reason for this policy is that you are not a professional lender who has a portfolio of loans that cover a wide spectrum of risk profiles.

Your entire portfolio would consist of one loan to one person. That lack of diversification by itself makes this a higher risk undertaking. The second question is what collateral would you attach to the loan to cover your capital against a default?

Given that you have told me that you do not have much money and what you have has to cover for emergency situations I would say that you are not well enough capitalized to undertake a high risk venture.

You can have a lawyer draw up a loan agreement that covers terms, rate of return, and collateral but it would in no way guarantee a return of capital or interest in the case of default.

Happy capitalism!

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