Advice on how to borrow money from friends

It is easy to borrow but important and common to loan money to less fortunate friends.

It is very difficult to park money in case you want to set aside some for future. The recent stock market depression has eroded 10 trillion dollars in investments by individuals and corporations. I have been a borrower and a lender at different phases of my life. As lender my experience is that friends just do not want to pay back. I have tried lending money to friends and relatives even after getting a “Written Note” but money simply does not come back. Being a co-signer on a loan to a friend is even worst. In case your friend (for whom you co-signed a loan) does not pay back in time than you end up messing up your credit score that you have build up over such a long time.

Apart from taking a “Written Note” you should involve a Bank while lending money to a friend. Over a period of time I have evolved a successful “Hybrid” strategy to help friends who approach me for a personal loan. This strategy also tests that if you are credit worthy of helping a friend.

Under this “Hybrid” strategy your money is at risk but your credit rating does not get messed up in case your friend delays or defaults on her loans. Create a simple “Certificate of Deposit/Fixed Deposit” for the amount you want to help your friend with. If you are unable to create this Certificate of Deposit than you immediately know that you are not financially strong enough to help yourself so how can you go ahead and help a friend. Suppose you are able to obtain the money for this Certificate of Deposit. Create this Certificate of Deposit at a lending institution of the choice of your borrower friend. Create this Certificate of Deposit for a period that extends little bit beyond the time for which your friend has asked loan for. Allow the lending institution of your friend to have your Certificate of Deposit as collateral for lending out money to your borrower friend. Let your friend take out a term loan ( repayment is made thru equal monthly installments spread over the period of the loan) against this Certificate of Deposit. As your borrower friend repays back his term loan his outstanding debt shall decrease and your Certificate of Deposit shall grow steadily.

Your friend is bound to delay his repayments but than you have already created the Certificate of Deposit for a period longer than the term loan availed by your friend. You do not have to chase your friend for repayment of the term loan installments. The lending institution shall chase him to repay them back in time. All the delayed repayments shall be reported on your borrower friends credit report only. You certainly can loose all your money in case the lending institution fails out on various recovery options to get back their term loan.

My experience has been good for lending out to friends using the above Hybrid Strategy. Test it out and you would not regret in the same manner as you would have regretted loaning the money directly to your friend.

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