Loans to adult children and friends?
When you are doing well and have a nice surplus (and the world can see it!) there is a good chance that people come to you for help. Nothing wrong in their coming, and nothing wrong in your giving, however it is not easy.
Let me give you a few examples:
Mr. M an executive was buying a house and needed Rs. 1 million as down payment. He approached his uncle for a loan. His uncle, a childless retired man obliged with a Rs. 500,000 loan. This was supposed to carry interest at Rs. 13%p.a. and the loan itself was repayable over a 5 year period in bullets of Rs. 1 L each. Fair deal, right?
Well Mr. M is paying the interest on the dot – twice a year. In the past 5 years he has not paid a penny of the total loan amount. This has not got the uncle worried – he is happy to get 13% return on his principal.
Mr. M has the cash to repay, but is not repaying……when I probed, the truth came out. Mr. M is hoping that on the death of his uncle and aunt, NOBODY will know / remember the loan.
Second:
When Mr. A’s son finished his studies I suggested a heart to heart talk with his son about finances. Obviously it never happened. One day a classmate of his got him to sign a bank guarantee of Rs. 25,00,000 for his younger brother’s education. Now there is no clue as to how long that boy is going to take to repay the loan. However when Mr. A’s son went for a bank loan for his OWN education, that guarantee played spoil sport.
Just 2 cases out of the zillions that I come across….
So how does one give a loan?
Simple keep it in writing. It should contain the request, the reason for the loan, the fact that the borrower is unable to fund it himself, the amount of the loan, the interest payment (let it be 2% p.a. but not be zero), the repayment terms, GUARANTOR – let the borrower’s son, father, wife, girlfriend, ….somebody be involved, cheque number, post dated cheques for repayment, – do it like a perfect business deal.
This does one good thing – signing on a stamp paper puts a lot of burden on the common man. He/she thinks it is a legal document (which it is), and so he is far far more careful.
I have a friend who is in the businss of money lending – ONLY own corpus of Rs.8 crores – but his documentation, securitization, margin calculation, etc are so perfect that in the past 30 years he has had no BAD DEBTS.
Worth creating documentation! sigh! really…..
Andy
Besides the point, but I hope Mr.M realizes that even paying a simple interest of 13% over 5 years means he has paid up 3.25 Lakhs interest. In another 3 years he would have paid 5.2 Lakhs in interest to get a “free lunch” of 5 Lakhs.
Shankar
Hi Subra,
Relatives when they come for money, they will be in urgent situation or in desperation. That time, if we are ready to help then they will not wait for the documentation and registration and all. SO in that case, we end up giving money on the word promise.
Pramod
@andy, Nice calculation and after reading your comment I also thought about it. It is given in the story that he has the cash but not intentions to re pay. Now we can assume that this cash is earning him 9% interest (not difficult today) so he is effectively paying only 4.5% to his uncle which makes his cost of Capital for 8 years is Rs. 1.8 Lacs & not 5.2Lacs. So he can pray some more years for his uncle’s Moksha….
Shrinivas
Even with all that writing, guarantees from relatives, cheques for principal/interest, some relatives do not repay/ are not able to repay. In that case would we go to court to claim ?
Would it be better to lend money that we don’t mind losing ?
Rajat
Hi Subra,
Is it not illegal for individuals in India to charge interest while lending money?