Use Caution When Loaning Your Money!

Editor's note: Lisa Lehman is off this week, so please enjoy this column that previously ran on Patch.

Lisa,

My brother wants to borrow $5,000 from me. We are very close and I trust him. However, I think I should get something in writing in case he doesn’t pay me. What do you suggest?   Thank you.  -  Nancy   

Dear Nancy:       

You must be very careful when you loan money to any person, including family members. I have seen too many families become estranged over loans and other money issues.

From a practical standpoint, you should first find out why your brother wants to borrow money from you. If it is for something frivolous or extravagant, you may not want to loan your brother the money. However, if he has a legitimate need and the ability to repay you on the terms you set, you may want to help your brother out. This is a personal decision only you can make.

Nancy, you definitely should write up documents that evidence the loan. At the very least, you should have your brother sign a “Promissory Note.” A Promissory Note is a signed promise to repay the loan under specific terms on a given date. 

A Promissory Note should state the amount of the loan, the date the loan was made, when the loan is due in full, whether monthly or other periodic installment payments will be made, and the interest rate. If your brother will make installment payments, the Promissory Note should also provide that if he fails to make an installment payment when due, the loan will be considered to be in default. You may also want to include a provision assessing late charges. Further, it is prudent to include a clause stating that your brother will pay your attorneys’ fees and court costs if you have to sue him to collect the money you loaned him. Nancy, there are other important provisions that may need to be included depending on your circumstances. These are just some of the basics.     

In addition, you should strongly consider getting “security” for your loan. For example, you could secure the loan by placing a lien on your brother’s home (assuming he has equity in it) or other personal assets. Properly securing a loan is more complex, and requires additional documentation. However, you may avoid having to go to court if you properly secure your loan.

This column only touches on Promissory Notes and securing a loan. You should obtain legal counsel before making the loan to your brother. If you would like to discuss your situation in greater detail, please feel free to contact me.  

If any reader would like to ask me a legal question, post it on the Patch website or send your question to me at lehmanlawoffices@aol.com

Thank you for your question, Nancy.

My Best Regards,

Lisa

Disclaimer:  Please be aware that this column provides only legal advice of a general nature and it is not intended as legal advice for any person or group of persons. You must always consult with an attorney with respect to your particular legal situation.