Loan Terms -- Helping a friend going through Divorce?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
User avatar
Topic Author
JamesSFO
Posts: 3404
Joined: Thu Apr 26, 2012 10:16 pm

Loan Terms -- Helping a friend going through Divorce?

Post by JamesSFO »

Let's assume that I can easily afford to do this, want to do this, and recognize the risk of never seeing a penny returned and I'm walking in eyes open.

A friend going through a divorce is about to have a short term cash crunch and needs approximately $10K to help with getting a new apartment (first, last, security). I had initially offered to loan $10K as a balloon for 6 months (option A) below and had really not initially thought of charging anything. But realized there are weird income tax issues potentially and also there is some value to him recognizing there is SOME cost to me doing more than just a 6 month balloon.

But Option A is apparently non-viable so I want to propose some other choices and it feels like there should be costs associated with those choices so I'm thinking of offering up B & C. Thoughts/suggestions about ways to go? Again, my goal is I think to steer the friend to realize there is a cost of this plan and that my timeline to be paid back is 1 year.

Image
User avatar
grabiner
Advisory Board
Posts: 35307
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: Loan Terms -- Helping a friend going through Divorce?

Post by grabiner »

Check with the IRS rules whether you need to report the imputed interest, but I don't think you do on a loan of this size if the purpose is not investment and the money is not being used to earn income. Even if you do, it's a small enough amount that I wouldn't bother with it, or with charging interest or a fee.

It is probably better to have regular payments due, because this makes it something that your friend can budget for; it's probably much easier for your friend to spend money he shouldn't if he owes a $10K balloon he cannot make than if he owes a more reasonable monthly amount. I like something like $1250 per month for eight months.

And by all means, write up a loan document and have you and your friend sign it. Even if you don't intend to enforce the document in court, this will be a reminder to your friend that the money is owed.
Wiki David Grabiner
User avatar
Topic Author
JamesSFO
Posts: 3404
Joined: Thu Apr 26, 2012 10:16 pm

Re: Loan Terms -- Helping a friend going through Divorce?

Post by JamesSFO »

Good suggestions!
User avatar
in_reality
Posts: 4529
Joined: Fri Jul 12, 2013 6:13 am

Re: Loan Terms -- Helping a friend going through Divorce?

Post by in_reality »

What about a nominal late payment charge - say $10/week per missed payment combined and/or interest forgiveness (of the final 2% charge) if all payments are on time. Just some incentive you know.

Otherwise it might get to where they owe you say $2k and intend to pay you back but don't get around to doing it.

Maybe you are willing to write it off, but I'd have something incrementing to sort of keep in their mind that is the expectation. (Greece like re-negotiations notwithstanding).

Just a thought...
pennywise
Posts: 970
Joined: Sat May 31, 2014 6:22 am

Re: Loan Terms -- Helping a friend going through Divorce?

Post by pennywise »

JamesSFO wrote:Let's assume that I can easily afford to do this, want to do this, and recognize the risk of never seeing a penny returned and I'm walking in eyes open.
I suggest you think very long and very hard about doing this in the first place and if you do it make it a gift to your friend, because mixing friendship and finances WILL change the balance of your relationship regardless of whatever terms you set and your friend agrees to follow.

Once there is a business negotiation (lender-borrower in this case) each person inevitably begins to filter interactions through that prism. You will be constantly scrutinizing and monitoring his fiscal decisions, whether you want to or not, because you'll have a financial stake in them. Your friend will feel indebted to you because...he is!

Even if it's a gift, how will you feel if your friend shows up driving a hot sports car after you've given him ten grand? How will you feel if he takes a nice vacation, when you perhaps gave up your fun money so he could have a roof over his head? Again, even gifts are never psychologically given without strings attached no matter how pure our motives.

Especially for someone going through a divorce, emotions run high and life can be very unpredictable as it relates to finances; this is a time fraught with the possibility of unexpected and negative consequences.

Which is to say, if this is a solid friendship it might be the better part of valor to remain the buddy instead of the banker.
User avatar
Topic Author
JamesSFO
Posts: 3404
Joined: Thu Apr 26, 2012 10:16 pm

Re: Loan Terms -- Helping a friend going through Divorce?

Post by JamesSFO »

pennywise wrote: I suggest you think very long and very hard about doing this in the first place...
Not really helpful, I really do know the risks, not interested in hearing about them again.

For purposes of this discussion, ASSUME I've done all of the cost benefit calculations and came out with wanting to do some sort of nearly zero-interest rate loan and not wanting to do a gift.
User avatar
Topic Author
JamesSFO
Posts: 3404
Joined: Thu Apr 26, 2012 10:16 pm

Re: Loan Terms -- Helping a friend going through Divorce?

Post by JamesSFO »

in_reality wrote:What about a nominal late payment charge - say $10/week per missed payment combined and/or interest forgiveness (of the final 2% charge) if all payments are on time. Just some incentive you know.

Otherwise it might get to where they owe you say $2k and intend to pay you back but don't get around to doing it.

Maybe you are willing to write it off, but I'd have something incrementing to sort of keep in their mind that is the expectation. (Greece like re-negotiations notwithstanding).

Just a thought...
Thanks good suggestions!
mptfan
Posts: 7218
Joined: Mon Mar 05, 2007 8:58 am

Re: Loan Terms -- Helping a friend going through Divorce?

Post by mptfan »

JamesSFO wrote:
pennywise wrote: I suggest you think very long and very hard about doing this in the first place...
Not really helpful, I really do know the risks, not interested in hearing about them again.
I think that is the most helpful response you could get...the fact that you don't want to hear it is another matter. When you ask for advice, you don't get to censor what advice you think is helpful and what is not.
Five Scoop
Posts: 179
Joined: Fri Mar 23, 2012 3:21 pm

Re: Loan Terms -- Helping a friend going through Divorce?

Post by Five Scoop »

If this is a friend you want to help out then just be up front about the expectation of having the money paid back. I think you should ask your friend what kind of timeframe they will pay back the loan. If they tell you it will be five years then I think you could rightly say that interest would need to be charged. If it is within a year, is it really worth charging 1 or 2 percent of $10,000?
Triple digit golfer
Posts: 10433
Joined: Mon May 18, 2009 5:57 pm

Re: Loan Terms -- Helping a friend going through Divorce?

Post by Triple digit golfer »

If he's a friend and you want to keep it that way, for crying out loud, do not present him with a spreadsheet and charge fees. Either tell him the terms and hope he pays or tell him you can't lend him the money.

If you do it your way, unless he's as big a financial stickler as you are (doubtful; you're a disciplined Boglehead), this will end in a stained friendship. I know you don't think so, but nobody ever thinks it'll happen to them when they lend to friends. You'll feel resentment and he'll feel you're hounding him and don't need the money back right away.
User avatar
William4u
Posts: 1445
Joined: Fri Jun 01, 2012 3:02 pm

Re: Loan Terms -- Helping a friend going through Divorce?

Post by William4u »

mptfan wrote:
JamesSFO wrote:
pennywise wrote: I suggest you think very long and very hard about doing this in the first place...
Not really helpful, I really do know the risks, not interested in hearing about them again.
I think that is the most helpful response you could get...the fact that you don't want to hear it is another matter. When you ask for advice, you don't get to censor what advice you think is helpful and what is not.
+1 I have had a number of friends in this situation. The outcomes of giving loans to friends or family are often quite different from what the parties originally expected. These situations can and do turn out worse than expected for both parties.

Personally, I would either make it a gift or nothing at all. A loan to a friend often ends up becoming a gift anyway. I just know too many stories that start with "I happily gave a loan to my most trusted friend/family member" and end with "Our relationship has been permanently soured."

This article (and the discussion that follows it) explains some of the risks...
http://www.moneycrashers.com/why-you-sh ... nd-family/
User avatar
pondering
Posts: 1127
Joined: Fri Jan 30, 2015 10:04 pm
Location: 412-977-3526, originally 718-273-2422
Contact:

Re: Loan Terms -- Helping a friend going through Divorce?

Post by pondering »

You can gift the money...

Or just gift the repayments your friend can't make.

Up to 14,000 or so a year
--Robert Sterbal | robert@sterbal.com | 412-977-3526
User avatar
Raybo
Posts: 2244
Joined: Tue Feb 20, 2007 10:02 am
Location: San Francisco
Contact:

Re: Loan Terms -- Helping a friend going through Divorce?

Post by Raybo »

JamesSFO wrote: my goal is I think to steer the friend to realize there is a cost of this plan and that my timeline to be paid back is 1 year.
Why are these your goals?

Does you friend not understand that loans incur costs? Does your friend not understand that loans have to paid back?

I understand that you don't want to hear advice about not doing the loan, but are you willing to lose this friend over $100 (1% of 10,000)?

Frankly, I'd just loan him the money, get him/her to agree to a payback schedule, and not depend on getting it back and expect to lose the friendship. Note that these are loan "costs", as well.
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.
dolphinsaremammals
Posts: 2094
Joined: Tue Jul 22, 2014 4:18 pm

Re: Loan Terms -- Helping a friend going through Divorce?

Post by dolphinsaremammals »

JamesSFO wrote:
pennywise wrote: I suggest you think very long and very hard about doing this in the first place...
Not really helpful, I really do know the risks, not interested in hearing about them again.

For purposes of this discussion, ASSUME I've done all of the cost benefit calculations and came out with wanting to do some sort of nearly zero-interest rate loan and not wanting to do a gift.
Nonetheless, pennywise is correct.
User avatar
LadyGeek
Site Admin
Posts: 95696
Joined: Sat Dec 20, 2008 4:34 pm
Location: Philadelphia
Contact:

Re: Loan Terms -- Helping a friend going through Divorce?

Post by LadyGeek »

I removed a few off-topic posts (and replies). As a reminder, see: Forum Policy
We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
Grt2bOutdoors
Posts: 25625
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Loan Terms -- Helping a friend going through Divorce?

Post by Grt2bOutdoors »

Raybo wrote:
JamesSFO wrote: my goal is I think to steer the friend to realize there is a cost of this plan and that my timeline to be paid back is 1 year.
Why are these your goals?

Does you friend not understand that loans incur costs? Does your friend not understand that loans have to paid back?

I understand that you don't want to hear advice about not doing the loan, but are you willing to lose this friend over $100 (1% of 10,000)?

Frankly, I'd just loan him the money, get him/her to agree to a payback schedule, and not depend on getting it back and expect to lose the friendship. Note that these are loan "costs", as well.
+1 Either give him the money, else, let your friend borrow the money from a reliable lender like "Lightstream" where there are real issues if you don't pay back as agreed. It's not worth throwing away a friendship over this, or is it? Don't you think a divorce is enough of a lesson, you feel you need to "steer him back to realize there's a cost"? What is this elementary school?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Trader Joe
Posts: 2697
Joined: Fri Apr 25, 2014 6:38 pm

Re: Loan Terms -- Helping a friend going through Divorce?

Post by Trader Joe »

Do not loan money to friends. Gift your friend the money if you really want to help.
User avatar
LadyGeek
Site Admin
Posts: 95696
Joined: Sat Dec 20, 2008 4:34 pm
Location: Philadelphia
Contact:

Re: Loan Terms -- Helping a friend going through Divorce?

Post by LadyGeek »

Please stay factual. Focus on the loan - not the relationship issues.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
rustymutt
Posts: 4001
Joined: Sat Mar 07, 2009 11:03 am

Re: Loan Terms -- Helping a friend going through Divorce?

Post by rustymutt »

If this a private loan, no. Nobody else (IRS) has to even know about it. But now I do. I'll stay mum on it.
I've helped out friends in the past and would again, if asked. I was always well rewarded for being a friend.
And those kind of friends don't come often in life. Cherish the good times, the end comes faster to those that don't.
Even educators need education. And some can be hard headed to the point of needing time out.
Bfwolf
Posts: 2108
Joined: Thu Oct 14, 2010 11:19 am

Re: Loan Terms -- Helping a friend going through Divorce?

Post by Bfwolf »

I like the idea of asking your friend to propose the terms of repayment. If it's your friend's idea, your friend is more likely to follow through. You can then decide if those terms are acceptable to you. If it's relatively short term, I wouldn't bother with interest.

I agree that writing up the loan in a document is critical as a reminder to your friend. I think it would also be wise to tell your friend you're setting up an automated email that sends an email to both you and him/her every month to remind you guys of the payment due. This way you get the benefit of a reminder for your friend without it sounding like a nag from you.
TIAX
Posts: 1434
Joined: Sat Jan 11, 2014 11:19 am

Re: Loan Terms -- Helping a friend going through Divorce?

Post by TIAX »

Did your friend ask you for the loan or was this your idea?
mistike
Posts: 84
Joined: Wed Jan 21, 2015 2:25 pm

Re: Loan Terms -- Helping a friend going through Divorce?

Post by mistike »

I would ask him what he can propose first. I know if I were in this situation (his) I would propose a payment plan WITH interest and WITH a contract. If it comes from him, it will avoid any relationship problem - and you will see what it's worth to him.

Now, I don't know how you plan on presenting the thing. Do not give him the spreadsheet. Discuss the terms informally, then put whatever you agreed on in a spreadsheet and give it to him. The draw a contract.

If I were in your position, I would probably loan it interest free with a 1 year term. The hassle is not worth the $100, and it's not your role to " educate" him - he probably already knows borrowing money has a cost, and he probably doesn't feel very good about it.

Maybe you can reach an agreement where he will pay you a fancy dinner instead of (low) interests.
User avatar
Wildebeest
Posts: 1204
Joined: Fri Dec 27, 2013 1:36 pm

Re: Loan Terms -- Helping a friend going through Divorce?

Post by Wildebeest »

William4u wrote:
mptfan wrote:
JamesSFO wrote:
pennywise wrote: I suggest you think very long and very hard about doing this in the first place...
Not really helpful, I really do know the risks, not interested in hearing about them again.
I think that is the most helpful response you could get...the fact that you don't want to hear it is another matter. When you ask for advice, you don't get to censor what advice you think is helpful and what is not.
+2 I have had a number of friends in this situation. The outcomes of giving loans to friends or family are often quite different from what the parties originally expected. These situations can and do turn out worse than expected for both parties.

Personally, I would either make it a gift or nothing at all. A loan to a friend often ends up becoming a gift anyway. I just know too many stories that start with "I happily gave a loan to my most trusted friend/family member" and end with "Our relationship has been permanently soured."

This article (and the discussion that follows it) explains some of the risks...
http://www.moneycrashers.com/why-you-sh ... nd-family/
+ 1. Thanks William4U for the great link.

If the OP is set on going ahead, if I was the OP, I would gift. If OP wants the money back and goes ahead with the loan, I agree that OP would ask what the friend would suggest.

If what the friend suggests does not meet with OP's approval , I would suggest not to charge no interest for the first year or two. Make up a contract that after 2 years, it will go to a bank/collection bureau etc, who will take it from there (If you need the money or want to teach him a lesson, it will get you out of the middle).

By the way, whose idea is the loan? I would suggest to offer him a place to live, lend him a car etc. before playing bank.
The Golden Rule: One should treat others as one would like others to treat oneself.
User avatar
Topic Author
JamesSFO
Posts: 3404
Joined: Thu Apr 26, 2012 10:16 pm

Re: Loan Terms -- Helping a friend going through Divorce?

Post by JamesSFO »

Again thank you to those that provided actionable useful advice on my question to the rest of you not so much. I'm out.
User avatar
Wildebeest
Posts: 1204
Joined: Fri Dec 27, 2013 1:36 pm

Re: Loan Terms -- Helping a friend going through Divorce?

Post by Wildebeest »

I am sorry to hear, you are out.

It would be great to hear what you decided on, and how it worked out in the end.

I had not really paid attention to your avatar, till your posted you're out. Now I feel I should have.

Edited for grammar
Last edited by Wildebeest on Sun Feb 01, 2015 9:16 pm, edited 1 time in total.
The Golden Rule: One should treat others as one would like others to treat oneself.
dolphinsaremammals
Posts: 2094
Joined: Tue Jul 22, 2014 4:18 pm

Re: Loan Terms -- Helping a friend going through Divorce?

Post by dolphinsaremammals »

Wildebeest wrote: I had not really paid to your avatar, till your posted you were out. Now I feel I should have.
:D
Grt2bOutdoors
Posts: 25625
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Loan Terms -- Helping a friend going through Divorce?

Post by Grt2bOutdoors »

dolphinsaremammals wrote:
Wildebeest wrote: I had not really paid to your avatar, till your posted you were out. Now I feel I should have.
:D

+1.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
dailybagel
Posts: 553
Joined: Tue Feb 15, 2011 7:35 pm

Re: Loan Terms -- Helping a friend going through Divorce?

Post by dailybagel »

JamesSFO wrote:Again thank you to those that provided actionable useful advice on my question to the rest of you not so much. I'm out.
I have first-hand experience that you should really hear about. Unfortunately, the lessons fall outside of the constraints you have placed on this discussion.

Good luck; your intentions here seem very positive.
letsgobobby
Posts: 12073
Joined: Fri Sep 18, 2009 1:10 am

Re: Loan Terms -- Helping a friend going through Divorce?

Post by letsgobobby »

You don't make this kind of loan with a spreadsheet. You make it with your heart. And I suggest you don't expect to get paid back.
donall
Posts: 1079
Joined: Tue Mar 13, 2012 6:45 am

Re: Loan Terms -- Helping a friend going through Divorce?

Post by donall »

If you do make a loan to a friend or relative, have regular direct deposits made to your account. That way it is on autopilot.
alexost
Posts: 116
Joined: Wed Sep 05, 2012 1:59 pm

Re: Loan Terms -- Helping a friend going through Divorce?

Post by alexost »

Triple digit golfer wrote:If he's a friend and you want to keep it that way, for crying out loud, do not present him with a spreadsheet and charge fees.
:D :D Hilarious. Boglehead comedy.
User avatar
Riceman
Posts: 215
Joined: Sun Aug 11, 2013 5:50 pm

Re: Loan Terms -- Helping a friend going through Divorce?

Post by Riceman »

I once had an opportunity to offer a loan to a friend who was going through a hard time (he didn't ask for one). I didn't make the offer. I had the money to spare, but it would have been a substantial amount. The friend turned out fine, but I wish I had made the offer. I feel like making the offer would have been something I could have been very proud of, but I missed my chance.

I later lent a smaller amount of money to a friend. It turned out fine, and I'm glad I did it. I think being able to help friends and family who truly need it (and who will not become dependent on your after the loan) is one of the advantages of having money. If it's money you saved the boglehead way, even better.

I did not charge interest and I never mentioned the debt. My friend paid me back in a few staggered installments when she had the money. I think she felt responsible and wanted her debt paid as soon as possible.
User avatar
dm200
Posts: 23214
Joined: Mon Feb 26, 2007 1:21 pm
Location: Washington DC area

Re: Loan Terms -- Helping a friend going through Divorce?

Post by dm200 »

I have no idea wether this may be an issue or risk or something else, but might there be a way that during the property settlement/divorce "process" the ex or soon to be ex could grab some of this $10,000?

I would also consider going to a credit union where you both are eligible to join, and pledge your deposit of $10,000 on a share secured loan the friend would get. Almost all credit unions do not consider the borrower's credit, income, other debts, etc. The loan would be paid to the credit union and all you can lose is your money. You help the friend (as you express is your desire) and get out of the process of calculating interest .. and all that.
Coles
Posts: 119
Joined: Sat Sep 20, 2014 9:11 pm

Re: Loan Terms -- Helping a friend going through Divorce?

Post by Coles »

Any updates?
likegarden
Posts: 3181
Joined: Mon Feb 26, 2007 4:33 pm

Re: Loan Terms -- Helping a friend going through Divorce?

Post by likegarden »

My experience is that friends pay back loans when they are only in need temporarily, they actually would pay back gifts under the stated circumstances. I personally would pay back anything, do not take anything for free. How would a friend be able to meet me not paying back $10k when he has gainful employment?
epitomist
Posts: 240
Joined: Mon Jul 21, 2014 2:00 pm

Re: Loan Terms -- Helping a friend going through Divorce?

Post by epitomist »

Here is a helpful link to the April 2015 AFR from the IRS.

http://www.irs.gov/pub/irs-drop/rr-15-07.pdf

Looks like minimum interest for a short term loan is 0.48%.

One of my favorite parts of loaning money to friends is when the altruistic lender sees the borrower frivolously spending the money. Happens all the time with loans like this. Lender scrimps, forgoing luxuries to save money. Lends money to person not so disciplined and then resents the borrower when they buy luxuries enabled by the loan. Gets even better.when the repayments are slowed or stopped.
User avatar
Topic Author
JamesSFO
Posts: 3404
Joined: Thu Apr 26, 2012 10:16 pm

Re: Loan Terms -- Helping a friend going through Divorce?

Post by JamesSFO »

We drafted the promissory note, they decided to split and then decided to stay together... so no loan as of yet.
User avatar
Dale_G
Posts: 3466
Joined: Tue Feb 20, 2007 4:43 pm
Location: Central Florida - on the grown up side of 85

Re: Loan Terms -- Helping a friend going through Divorce?

Post by Dale_G »

Thanks for reporting in - and glad you are not "off". We will be sure to tune into the next episode :happy .

Dale
Volatility is my friend
User avatar
Topic Author
JamesSFO
Posts: 3404
Joined: Thu Apr 26, 2012 10:16 pm

Re: Loan Terms -- Helping a friend going through Divorce?

Post by JamesSFO »

No problem
mptfan
Posts: 7218
Joined: Mon Mar 05, 2007 8:58 am

Re: Loan Terms -- Helping a friend going through Divorce?

Post by mptfan »

Dale_G wrote:Thanks for reporting in - and glad you are not "off".
He said "I'm out" not off. 8-)
Post Reply