You might think a friend or family member will go easier on you than a bank would. But that’s not always the case. If you’re not on the same page as the lender on repayment terms, there can be problems.
That’s why it’s always best to have the terms of the loan written down. That way, it’s less likely there’ll be disagreements down the line.
For added protection, the lender may ask for security in return for the loan. This is a property interest the borrower gives the lender. The property is called collateral. It can be real property (land) or personal property (anything else).
If you give the lender a security interest and fail to repay the loan, they have the legal right to (among other things) take the collateral, sell it, and keep the proceeds.
If the lender asks for security in return for the loan, they may want a security agreement. With a security agreement, you assure the lender of your intention to provide a security interest.
If you’re struggling to make your payments, be up front with the lender. Explain what’s going on, and keep them updated on your finances. As with many situations in life, honesty is the best policy.
Step 2. Change the terms
If you can’t meet the terms of your agreement, inform the lender as soon as possible. If you explain yourself, they may agree to renegotiate the terms. Or they may agree to push back the repayment deadline.
Put the revised terms in writing — even if you didn’t have a written agreement to begin with. If you have a written agreement, see if it includes a process to revise the terms. If not, consider adding an “addendum.” This is an addition to the agreement that sets out more terms.
You could also choose to edit the original agreement directly. Just make sure you and the lender both initial any changes. Consider having a third party witness your signatures.
Step 3. Ask to have the loan forgiven
As a last resort, you can ask your friend or relative to forgive the loan. In other words, ask them to forget about repayment. If you can only afford to repay some, ask the lender to forgive whatever you can’t pay.
Write up a forgiveness agreement with the lender. Make sure it includes the amount being forgiven. If the loan’s being partly forgiven, the agreement should include:
the amount being forgiven
the amount to be repaid
the new payment schedule
Step 4. If you end up in court
If you breach the terms of the loan agreement, the lender may take legal action.
Usually, you’ll receive a demand letter first. It’ll request payment for the amount you owe. Contact the lender immediately if you get a demand letter. Discuss alternatives for repayment.
If you end up in court, the judge will decide if you’ve broken the terms of the agreement. If you have a written agreement, this will be fairly straightforward. If not, it will come down to who’s story the judge finds more credible based on the evidence presented by the two parties.