Author Topic: loaning a friend $50k, questions about how to do this properly  (Read 3179 times)

Valhalla

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loaning a friend $50k, questions about how to do this properly
« on: September 13, 2017, 12:32:49 PM »
I'm going to loan a trusted friend $50k to help him out of a rabbit hole and start his way to MMM living.

The friend currently has $50k in personal loans from finance companies to pay off some business debts, at a 8% interest rate.

I plan to loan him the $50k at 4% interest rate, so I will make decent interest on it while helping him reduce his interest expense.  He is definitely good for the $50k so I'm not worried about the security of my investment.  We will have a notarized loan agreement spelling out the interest rate, repayment terms, payment schedule, as well as some collateral for the loan.

Questions I have:  Do I need to issue a 1098 at year end for the personal loan?  I'm not in the business of loaning people or businesses money.  Do I also need to file a 1099-INT either?

I'm leaning towards "no" for these, and just recognize the interest income either on my schedule C or as a manual 1099-INT on my taxes.

I'm curious how others have handled this and have any other tips / advice.

« Last Edit: September 13, 2017, 01:06:46 PM by Valhalla »
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frugledoc

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #1 on: September 13, 2017, 01:56:59 PM »
I'm going to loan a trusted friend $50k to help him out of a rabbit hole and start his way to MMM living.

The friend currently has $50k in personal loans from finance companies to pay off some business debts, at a 8% interest rate.

I plan to loan him the $50k at 4% interest rate, so I will make decent interest on it while helping him reduce his interest expense.  He is definitely good for the $50k so I'm not worried about the security of my investment.  We will have a notarized loan agreement spelling out the interest rate, repayment terms, payment schedule, as well as some collateral for the loan.

Questions I have:  Do I need to issue a 1098 at year end for the personal loan?  I'm not in the business of loaning people or businesses money.  Do I also need to file a 1099-INT either?

I'm leaning towards "no" for these, and just recognize the interest income either on my schedule C or as a manual 1099-INT on my taxes.

I'm curious how others have handled this and have any other tips / advice.

It is very naive of you to even consider this.

What possible reasonable collateral can somebody who is in such debt offer against a 50k debt?  What is the loan to collateral value %

If you are ultimately lending unsecured, you should expect to not see your money back. Happens all the time, even in close families where ties are stronger than close friends


Valhalla

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #2 on: September 13, 2017, 01:58:28 PM »

It is very naive of you to even consider this.

What possible reasonable collateral can somebody who is in such debt offer against a 50k debt?  What is the loan to collateral value %

If you are ultimately lending unsecured, you should expect to not see your money back. Happens all the time, even in close families where ties are stronger than close friends

Ok I fully understand where you are coming from.   Collateral includes interest in the business, as well as some business assets.  It will be 100% loan to collateral value.

My friend is extremely responsible and insisted that we do this the right way.  He has never been late on any payments or defaulted on any obligations in his entire life that I have known him.  So my trust in him is extremely high. 

I feel very comfortable doing this, and to be honest, $50k is a drop in the bucket for me in terms of net worth and FIRE stash.  Even in the worst case were I to lose it, it would hurt but would not drastically affect me financially.

I have lost $100k before on a real estate deal that went bad, and even that didn't put a dent on my FIRE status for too long.  So all things considered I'm pretty comfortable with the slight risk of this loan.
« Last Edit: September 13, 2017, 02:03:07 PM by Valhalla »
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RobFIRE

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #3 on: September 13, 2017, 02:55:55 PM »
I saw the title of this thread and planned to reply along the lines of "don't do it", though from what you've written it seems that you're taking all the sensible steps. However, if the loan is genuinely lower risk due to the friend being a responsible business owner with collateral in the business, can they not find a commercial loan at a lower rate?

dandarc

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #4 on: September 13, 2017, 03:06:27 PM »
I actually read the title as "losing a friend over $50K"  Probably because that's what I'm expecting to happen.

If your friend is as reliable as you say he is, why can't he get better terms from a bank?

Anyway - if anyone needs to file anything, it is probably your friend sending you a 1099-INT.  As long as you report the income, even if no other forms are filed, you should be OK.  All of the 1098 varieties I'm seeing have nothing to do with a business or personal loan, unless there is some kind of mortgage involved?

ROF Expat

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #5 on: September 13, 2017, 03:12:14 PM »
What's the length of the loan you're thinking of?  If his business situation is really sound and this is a short term problem, it should be a short term loan, maybe a couple of years.  If he's not planning on paying it back quickly, perhaps his business situation isn't as good as you think. 

Really, what you're giving him is $2,000 per year in interest savings (shrinking steadily, unless there's a balloon payment).  In exchange, you're taking on a $50,000 liability for 4% interest. 

Since the money doesn't seem particularly significant to you, I'd be more concerned about losing the friendship than losing the money.  If I were in your shoes, and he were really a good friend, I'd suggest that he keep the loan, but I'd offer to just give him the difference in interest payments, i.e. I'd give him $5K to make the interest payments as he pays off the loan over three years.  If he can't service his loan with the bank, you haven't lost much money and you're still friends.  If things go well, he'll probably insist on paying you back at the end of the three years, and I'd take the money.  But I wouldn't ask for, or take, any payments in the meantime, and I wouldn't even want to discuss it. 

YMMV


Valhalla

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #6 on: September 13, 2017, 03:13:02 PM »
I saw the title of this thread and planned to reply along the lines of "don't do it", though from what you've written it seems that you're taking all the sensible steps. However, if the loan is genuinely lower risk due to the friend being a responsible business owner with collateral in the business, can they not find a commercial loan at a lower rate?
It seems most SBA loan rates are in the 6-8% range currently.  He thought about refinancing to a 6% loan but this is a very short term loan that he will pay off in about a year.  So it would be easier if I loan him the money and get repaid in 1 year, instead of him having to do the tons of paperwork to refi to reduce 1 or 2%.  He almost wouldn't refi due to the hassles but with our arrangement it would be quick and easy, for both of us.
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Valhalla

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #7 on: September 13, 2017, 03:17:08 PM »
What's the length of the loan you're thinking of?  If his business situation is really sound and this is a short term problem, it should be a short term loan, maybe a couple of years.  If he's not planning on paying it back quickly, perhaps his business situation isn't as good as you think. 

Really, what you're giving him is $2,000 per year in interest savings (shrinking steadily, unless there's a balloon payment).  In exchange, you're taking on a $50,000 liability for 4% interest. 

Since the money doesn't seem particularly significant to you, I'd be more concerned about losing the friendship than losing the money.  If I were in your shoes, and he were really a good friend, I'd suggest that he keep the loan, but I'd offer to just give him the difference in interest payments, i.e. I'd give him $5K to make the interest payments as he pays off the loan over three years.  If he can't service his loan with the bank, you haven't lost much money and you're still friends.  If things go well, he'll probably insist on paying you back at the end of the three years, and I'd take the money.  But I wouldn't ask for, or take, any payments in the meantime, and I wouldn't even want to discuss it. 

YMMV
the loan terms will be 1 year, so very short term.  I don't want to give him money, and he doesn't want to accept money at my cost, to save him interest expense.  He is willing to accept the money with the understanding I'll make a decent interest rate on it, while he's saving some money on interest as well. 

We've been through thick and thin life experiences together, so I don't believe there would be much risk of a loss of friendship in this case.  Our friendship is worth many times the amount of this loan, and he makes a healthy income so there is little risk to him or me in reality.  He even will have me as a beneficiary of his life insurance to cover the loan should something accidental happen, so I feel as if pretty much all angles are covered.  Nothing in life is 100% risk free, but this is pretty risk free as it gets, in my opinion.  I'm ok with what little risk is left at this point.

Thanks for the reply.
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Valhalla

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #8 on: September 13, 2017, 03:18:18 PM »
I actually read the title as "losing a friend over $50K"  Probably because that's what I'm expecting to happen.

If your friend is as reliable as you say he is, why can't he get better terms from a bank?

Anyway - if anyone needs to file anything, it is probably your friend sending you a 1099-INT.  As long as you report the income, even if no other forms are filed, you should be OK.  All of the 1098 varieties I'm seeing have nothing to do with a business or personal loan, unless there is some kind of mortgage involved?
I agree.  I don't see the need to file 1098 but wanted to double check.  I don't think my friend will bother sending a 1099-INT, but I will self report the interest as a manual 1099-INT.
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ROF Expat

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #9 on: September 13, 2017, 03:19:49 PM »
A one year loan?  To modify what I wrote above, I'd just give him the $2k you'd be saving him.  Or even the $4k for all the interest.  The $2k you'd potentially earn, minus fees from a lawyer and notary to get it all on paper, and the minus the taxes wouldn't be worth the risk to the friendship. 

I saw the title of this thread and planned to reply along the lines of "don't do it", though from what you've written it seems that you're taking all the sensible steps. However, if the loan is genuinely lower risk due to the friend being a responsible business owner with collateral in the business, can they not find a commercial loan at a lower rate?
It seems most SBA loan rates are in the 6-8% range currently.  He thought about refinancing to a 6% loan but this is a very short term loan that he will pay off in about a year.  So it would be easier if I loan him the money and get repaid in 1 year, instead of him having to do the tons of paperwork to refi to reduce 1 or 2%.  He almost wouldn't refi due to the hassles but with our arrangement it would be quick and easy, for both of us.

ROF Expat

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #10 on: September 13, 2017, 03:22:38 PM »
Just saw your last. 

You know your friend and his situation.  I hope it works out for you both.

Valhalla

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #11 on: September 13, 2017, 03:23:10 PM »
A one year loan?  To modify what I wrote above, I'd just give him the $2k you'd be saving him.  Or even the $4k for all the interest.  The $2k you'd potentially earn, minus fees from a lawyer and notary to get it all on paper, and the minus the taxes wouldn't be worth the risk to the friendship. 

I agree with you, we discussed this very carefully, and my friend does not want the loan if I am at all uncomfortable about it.  I told him I thought it through and there is virtually no risk with the way we have structured it, so I think it will be a win-win arrangement.  I have a contract drafted up already, and we will get everything notarized at the same bank we both use.

It is possible I could get burned, but after thinking this through for a few days I'm pretty convinced there is virtually no risk.
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Valhalla

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #12 on: September 13, 2017, 03:25:04 PM »
Just saw your last. 

You know your friend and his situation.  I hope it works out for you both.
Thanks, I appreciate it.  I have never loaned money to friends / family because I am a very wary of lending any money, and my friend has never accepted money from friends / family because he is also extremely financially responsible.  This is a rare case where we both could save / make some money on a loan that he would have to pay on no matter what.
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SC93

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #13 on: September 13, 2017, 04:10:23 PM »
I think you should just GIVE him the money. That way you will see how good of a friend he is. Tell him that you would like to be paid back x amount but if he doesn't pay you back, it's ok, no sweat. It's the exact same thing, just different verbiage. Don't ever loan anyone anything, either give it to him or walk away.

Valhalla

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #14 on: September 13, 2017, 04:15:35 PM »
I think you should just GIVE him the money. That way you will see how good of a friend he is. Tell him that you would like to be paid back x amount but if he doesn't pay you back, it's ok, no sweat. It's the exact same thing, just different verbiage. Don't ever loan anyone anything, either give it to him or walk away.
Then I would have to pay gift tax on it... ;)

I know you said it in tongue and cheek, but people actually do loan others money from time to time and not every instance turns out bad... shocking, I know!! :)
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Optimiser

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #15 on: September 13, 2017, 04:23:27 PM »
I have to agree with the other posters who suggest not loaning the money. Your friendship isn't worth the few thousand dollars you would both gain by doing the transaction.

If you are going to go through with it, it sounds like you have thought it through and covered all of your bases.

Miss Piggy

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #16 on: September 13, 2017, 06:42:18 PM »
OP, I'm sorry, but this simply does not pass the sniff test for me. If this guy is truly planning to pay off his existing loans within a year, then what's the point? The savings are pretty minimal.

Papa bear

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #17 on: September 13, 2017, 06:53:48 PM »
Wow there is a lot of vitriol here. Dude knows his buddy and the business.  Sure there is some risk, but that's for him to decide.

Go for it. And post back with how it goes, especially the compliance piece. I would be interested in hearing more. 


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Valhalla

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #18 on: September 13, 2017, 08:10:32 PM »
OP, I'm sorry, but this simply does not pass the sniff test for me. If this guy is truly planning to pay off his existing loans within a year, then what's the point? The savings are pretty minimal.
on $50k balance, the savings will be around $1k... sure it's minimal, but free $1k for pretty very little effort, risk and work... why not?
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Valhalla

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #19 on: September 13, 2017, 08:21:52 PM »
Wow there is a lot of vitriol here. Dude knows his buddy and the business.  Sure there is some risk, but that's for him to decide.

Go for it. And post back with how it goes, especially the compliance piece. I would be interested in hearing more. 


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Thanks for the support!  I actually appreciate all of the posts, even the ones where people are giving me good warnings on not to do it.

It's good to have people give the devil's advocate viewpoint.  I would be as skeptical as them as well, if I didn't know my friend as well as I actually do.  I'm a huge skeptic of most things, so I'm normally against things like this.

But as I mentioned I actually do really trust my friend (and vice versa) so it will be easy money for both of us.

I'll definitely post any additional required filings, etc.  Right now I'm thinking all I need is a manual 1099-INT for my self-reported interest income.  I may file a manual 1098 but that seems overkill for a personal loan, so I will most likely skip it.
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Miss Piggy

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #20 on: September 13, 2017, 08:25:59 PM »
OP, I'm sorry, but this simply does not pass the sniff test for me. If this guy is truly planning to pay off his existing loans within a year, then what's the point? The savings are pretty minimal.
on $50k balance, the savings will be around $1k... sure it's minimal, but free $1k for pretty very little effort, risk and work... why not?

Okay. Just wanted to make sure I wasn't missing something. Hope it works out well for both of you!

Sounds like you're really trying to properly dot all the i's and cross all the t's*, so proper paperwork might be a good topic to talk over with an accountant.

*For your grammaristas out there, I really didn't want to add the apostrophes above, but the "letters" didn't look right without them. Feel free to point out if the apostrophes are incorrect so I know next time.

Valhalla

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #21 on: September 13, 2017, 08:27:57 PM »
OP, I'm sorry, but this simply does not pass the sniff test for me. If this guy is truly planning to pay off his existing loans within a year, then what's the point? The savings are pretty minimal.
on $50k balance, the savings will be around $1k... sure it's minimal, but free $1k for pretty very little effort, risk and work... why not?

Okay. Just wanted to make sure I wasn't missing something. Hope it works out well for both of you!

Sounds like you're really trying to properly dot all the i's and cross all the t's*, so proper paperwork might be a good topic to talk over with an accountant.

*For your grammaristas out there, I really didn't want to add the apostrophes above, but the "letters" didn't look right without them. Feel free to point out if the apostrophes are incorrect so I know next time.
thanks for posting your thoughts on this matter, I appreciate it!!

I've done some research into this about the loan document, the tax reporting, etc., so I believe I should be pretty safe. I have a relative who is a CPA whom I will run this all by later, once I have final docs. 
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Paul der Krake

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #22 on: September 13, 2017, 09:09:48 PM »
I'll be the lone voice of support.

I have inter-generational relatives who have done this with great success. The loaner gets to feel good helping out the younger generation and gets a better rate on his savings than available at the bank, the loanee gets a break on financing costs. So long as everybody goes into it with good faith, everyone wins.

It sounds like you've thought through this.

Louis XIV

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #23 on: September 13, 2017, 09:44:24 PM »
I'll be the lone voice of support.

I have inter-generational relatives who have done this with great success. The loaner gets to feel good helping out the younger generation and gets a better rate on his savings than available at the bank, the loanee gets a break on financing costs. So long as everybody goes into it with good faith, everyone wins.

It sounds like you've thought through this.

Friend  /= Family.

Ripping off a family member usually equals being ostracised (not always, but usually), from the rest of the family. Ripping off a friend, you lose a friend and maybe some mutual friends.

$50k is a crazy amount of money to loan someone unless you're 100% willing to lose it. There is no way to "do it properly" OP is taking on the risk from other lenders, without the profit or the loan book to spread the risk over. They'd be better off just giving them the 4% difference interest amount, well worth paying $2,000/year presumably for a year or two, to not lose their entire $50k. If it goes on beyond a year or two, they can cut off covering the additional 4%, they can't magically pull their $50k back.

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #24 on: September 13, 2017, 09:54:24 PM »
I'm not opposed to you doing this; I'm just opposed to the way you've sold yourself that it is 'zero' risk.

The risk is that he doesn't pay you, the collateral turns out to be tough to monitize, lawyers get involved and you lost $50k and a friendship all in an ill-advised attempt to save your buddy $1k over the next 12 months. 

Let the bank take the credit (and friendship!) risk...otherwise, at least admit that something 'could' go wrong.

Best of luck to you both!

PDXTabs

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #25 on: September 13, 2017, 11:02:58 PM »
OP, I'm sorry, but this simply does not pass the sniff test for me. If this guy is truly planning to pay off his existing loans within a year, then what's the point? The savings are pretty minimal.

A treasury bill coming due in 12 months is currently yielding ~1%, the friend is paying 8%. A personal loan at 4% seems like a good deal for both of them, as long as they trust the friend to pay it back.

SC93

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #26 on: September 13, 2017, 11:23:15 PM »
I think you should just GIVE him the money. That way you will see how good of a friend he is. Tell him that you would like to be paid back x amount but if he doesn't pay you back, it's ok, no sweat. It's the exact same thing, just different verbiage. Don't ever loan anyone anything, either give it to him or walk away.
Then I would have to pay gift tax on it... ;)

I know you said it in tongue and cheek, but people actually do loan others money from time to time and not every instance turns out bad... shocking, I know!! :)

My friend and I have been business partners since 1989. All-in-all I have no clue how many hundreds of thousands of dollars have been back and forth between us. So while I know it can be done, it is rare. The weird thing is that we just did a transfer of the exact amount. He is buying a rental and needs $50k now. I have signed blank checks of his, he has my social security  number..... no secrets between he and I. Outsiders never know what to think when they hear about us. lol The difference is that he and I both have a solid base to work from as far as money goes. If you lose $50k how is it going to make a difference in your life? <<< I'd say that's the most important question.......

Villanelle

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #27 on: September 13, 2017, 11:56:28 PM »
My parents loaned my husband and I enough to pay off our mortgage.  We have set terms, and a lien against the property.  We write off the mortgage interest on our taxes, and my dad claims it as income.  I have no idea how he documents that, but I know he does it.

Lots of comments on the choice to lend to a friend.  I probably wouldn't do it for that large an amount, but I'm not as anti-loan as most people here.  As I said, I've benefited from a family loan.  We moved overseas and the property is no longer owner occupied so we were unable to re-fi at the lower rates that would have been available.  I've never missed a payment and look at this obligation in the same way I do any other financial obligation.  If anything I suspect it is more important, not less.  It's really tough to know whether a friend would view it that way, and hopefully you've had some candid conversations with him about that so he knows you expect this to be paid each month on time, no matter what else pops up in his life.  I still think it's somewhat foolish--especially such a large amount all at one.  But if you are hellbent on doing it, at least talk frankly with him about the expectations, including that your loan is a firm commitment from him and there will be no "short this month because X came up". 

dcamnc

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #28 on: September 14, 2017, 05:30:00 AM »
I wouldn't do it, unless you can afford to write off the money. Whenever you personally loan money, especially to a non-family member, think of it as a gift. If you get it (or some of it) back, great; if not, just write it off as per your original plan.

JayKay

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #29 on: September 14, 2017, 07:53:36 AM »
I've done this before, albeit with a much lower amount, between 5k and 10k.

In one of the instances, I was paid back.  In another, I only saw one partial payment and the person essentially ditched.  I still have the contract and did consider hiring a collections agency.

My advice is this:

1) Get it in writing.  It seems like you may have that part taken care of already

2) Have a penalty for late payments. 

3) The 4% rate seems really low, consider upping that

4) Most importantly, as others have said, consider the money gone as soon as you loan it.

Hope it works out for you!

Drifterrider

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #30 on: September 14, 2017, 08:38:54 AM »
Considering the amounts involved, consult a CPA.

Learn "Imputed Interest".

If you friend is using his business as collateral, he should already have a CPA who should be assisting him.

Unless $50,000 is pocket change to you, YOU should consult with an attorney.

kite

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #31 on: September 14, 2017, 09:29:24 AM »
One can start their way to MMM living without exploiting personal relationships for 50 Thousand.

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #32 on: September 14, 2017, 09:36:11 AM »
I'm an attorney with limited knowledge of your friend's business, but just wanted to posted to let you know that "collateralizing" your friend's business interests may effectively be worthless.  The business may be worth close to nothing and anything of actual monetary value may already have a lien ahead of you. For example, I have a client with a tool and die business that brings in multiple hundreds of thousands per year, but his business is worthless due to a bunch of loans and liens on his equipment. This is just my pessimistic speculation, but if you are going to loan someone $50k, you might as well pay an attorney $500 to look at the situation.

Also, I just don't understand the point of this. My wife and I have about $15k in car loans and $10k left on her student loans. We wouldn't in a billion years ask for someone to loan us $25k just so we could save money on the interest, because we are just going to pay these off by the end of next year anyway. 

More bluntly, what's the point of this loan? I just don't get it.

Lastly, and I've been guilty of this before, but I don't know why you even posted. You reached a conclusion that this was somehow risk free, and despite poster's telling you the contrary, you're still convinced it's risk free.  If you're comfortable with your decision, go for it--you don't need a bunch of rando's approval on a message board.
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Re: loaning a friend $50k, questions about how to do this properly
« Reply #33 on: September 14, 2017, 10:35:40 AM »
Don't friends want what's best for each other?  Shouldn't your friend desire you to get reasonable interest / collateral comparable to your risk?  What is the normal interest/collateral for hard money lenders on 1yr loans... ?  This is what I would give you and I'm not even a friend (who is supposed to care about your well being.)  Wouldn't you want your friend to get this for his hard money loan?

Give him $2,000 and tell him he owes you a beer and be done with it. 

But since your mind is made up... good luck and I hope you make $2,000!

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #34 on: September 14, 2017, 11:09:05 AM »
I'm going to loan a trusted friend $50k to help him out of a rabbit hole and start his way to MMM living.

The friend currently has $50k in personal loans from finance companies to pay off some business debts, at a 8% interest rate.

I plan to loan him the $50k at 4% interest rate, so I will make decent interest on it while helping him reduce his interest expense.  He is definitely good for the $50k so I'm not worried about the security of my investment.  We will have a notarized loan agreement spelling out the interest rate, repayment terms, payment schedule, as well as some collateral for the loan.

Questions I have:  Do I need to issue a 1098 at year end for the personal loan?  I'm not in the business of loaning people or businesses money.  Do I also need to file a 1099-INT either?

I'm leaning towards "no" for these, and just recognize the interest income either on my schedule C or as a manual 1099-INT on my taxes.

I'm curious how others have handled this and have any other tips / advice.

Make sure you perfect your security interest!  If you're not sure how to do this, definitely consult a lawyer and have the proper loan documents drawn up and forms filed.

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #35 on: September 14, 2017, 11:22:03 AM »
Leaving aside whether this is a good idea or not (as I see that has been covered), your friend needs to issue you a 1099-INT for the interest that he pays you every year.

One thing that I have not seen mentioned, is that if you structure this as a loan, and your friend does not repay you, you can write off the uncollected debt as a capital loss on your taxes. But to do that this really does need to be a loan that you're expecting your friend to repay. It sounds like you are documenting the loan, so that's a good start.

Valhalla

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #36 on: September 14, 2017, 09:15:56 PM »
I'm an attorney with limited knowledge of your friend's business, but just wanted to posted to let you know that "collateralizing" your friend's business interests may effectively be worthless.  The business may be worth close to nothing and anything of actual monetary value may already have a lien ahead of you. For example, I have a client with a tool and die business that brings in multiple hundreds of thousands per year, but his business is worthless due to a bunch of loans and liens on his equipment. This is just my pessimistic speculation, but if you are going to loan someone $50k, you might as well pay an attorney $500 to look at the situation.

Also, I just don't understand the point of this. My wife and I have about $15k in car loans and $10k left on her student loans. We wouldn't in a billion years ask for someone to loan us $25k just so we could save money on the interest, because we are just going to pay these off by the end of next year anyway. 

More bluntly, what's the point of this loan? I just don't get it.

Lastly, and I've been guilty of this before, but I don't know why you even posted. You reached a conclusion that this was somehow risk free, and despite poster's telling you the contrary, you're still convinced it's risk free.  If you're comfortable with your decision, go for it--you don't need a bunch of rando's approval on a message board.
My post was not to ask for approval, but to ask for help from a compliance and documentation perspective.  I was thinking if there were any reasons to file a 1098 or 1099-INT or any other documents I hadn't thought of.

But thank you for your post.  The point of this entire loan is that it accidentally came up in discussion, and being great friends, we both realized we could save / make money on doing this instead of paying the money to 3rd party finance companies.  It's not that my friend needs the loan (he's perfectly fine as is), but it's that I get to make $1k, he gets to save $1k, and there is no risk involved... I know my friend's situation intimately (I helped him start the business), so I know there is as much risk in loaning him the money as there is in me just losing the money myself... virtually none.

I appreciate the advice and the time you took to post it, it is helpful to me and I'm sure to many others who read this and are in similar situation in the future.
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Valhalla

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #37 on: September 14, 2017, 09:18:27 PM »
Don't friends want what's best for each other?  Shouldn't your friend desire you to get reasonable interest / collateral comparable to your risk?  What is the normal interest/collateral for hard money lenders on 1yr loans... ?  This is what I would give you and I'm not even a friend (who is supposed to care about your well being.)  Wouldn't you want your friend to get this for his hard money loan?

Give him $2,000 and tell him he owes you a beer and be done with it. 

But since your mind is made up... good luck and I hope you make $2,000!
Not sure why the negative tone.  Normal interest for my money is 1% at best... I'm getting 4% pretty much risk free from him... I can't imagine anyone else giving me 4% interest on my money that's backed up by hard assets and 100% ability to repay. 

Similarly, since I know my friend very well and the actual low risk level, I think a 4% interest to him is more than fair.  If I were loaning to a stranger, I would demand 50% at least  (or probably never do the loan at all)... so when you say "normal interest / collateral"... I would have to say I am charging normal interest in my case.
« Last Edit: September 14, 2017, 09:33:31 PM by Valhalla »
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Re: loaning a friend $50k, questions about how to do this properly
« Reply #39 on: September 14, 2017, 09:25:13 PM »
Leaving aside whether this is a good idea or not (as I see that has been covered), your friend needs to issue you a 1099-INT for the interest that he pays you every year.

One thing that I have not seen mentioned, is that if you structure this as a loan, and your friend does not repay you, you can write off the uncollected debt as a capital loss on your taxes. But to do that this really does need to be a loan that you're expecting your friend to repay. It sounds like you are documenting the loan, so that's a good start.
Thanks for the tip.  Based on my research it looks like my friend does not need to issue a 1099-INT for the interest.

From the 1099-INT instructions:
Quote
interest excluded from reporting. You are not required to file Form 1099-INT for interest on an obligation issued by an individual, interest on amounts from sources outside the United States paid outside the United States by a non-U.S. payer or non-U.S. middleman, certain portfolio interest, interest on an obligation issued by an international organization and paid by that organization, and payments made to a foreign beneficial owner or foreign payee. See Regulations section 1.6049-5 for more information.
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Re: loaning a friend $50k, questions about how to do this properly
« Reply #40 on: September 14, 2017, 09:30:10 PM »
You might find this interesting: https://ournextlife.com/2016/01/11/why-we-ignored-the-experts-and-loaned-money-to-family/
Thanks for the link... very good article. I agree with all of the points that were made.

And as a general post for the rest of replies:

I'm well aware of the negatives as well...and I would've been one of the most fervent anti-personal loan people that exists... but in this case I know my friend very well, and I trust him.  I rarely trust people... and in this case the trust is well deserved.

In fact, I had a conversation with a mutual friend of ours... and I mentioned I would be making a personal loan. The mutual friend asked "really, who are you loaning money to?"...and looked like he was prepared to shoot down my idea.  I said "I'm loaning the money to friend X"... and the mutual friend instantly said "oh...that should be no problem at all!"

Our mutual friend works in finance and is one of the most careful and conservative individuals I know, and the fact that he instantly said "oh...that's fine" tells me that my instinct is not wrong. :)
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Re: loaning a friend $50k, questions about how to do this properly
« Reply #41 on: September 15, 2017, 02:59:53 AM »
@Valhalla I understand you are asking for help from a compliance and documentation perspective - which I have no idea. But I would be interested to know how it works out for you.

Did you end up loaning the money, and get it back plus interest? Please update this thread - if you want to.

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #42 on: September 15, 2017, 06:31:04 AM »
If your friend can afford to pay you back the $50k in one year, why can't he pay, say $40k to the whomever he owes money to now?  What I'm getting at is, what's stopping him from paying his debt? 

And to answer your question, I wouldn't loan anyone that sum of money. Too much at risk.
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Re: loaning a friend $50k, questions about how to do this properly
« Reply #43 on: September 15, 2017, 06:46:19 AM »
Valhalla, I just want to commend you for your patience while we have all, over and over again, tried to discourage you from making the loan and with few exceptions, avoided the whole purpose of your post. Sounds like you're getting the tax stuff figured out mostly on your own. Good for you.

Milizard

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #44 on: September 15, 2017, 07:04:25 AM »
Don't do it.  Have you read the millionaire next door?  He needs to work for it himself,  and you will be denying him the satisfaction of climbing out on his own. When you climb out on your own, you build up your financial muscles. If someone bails you out, you remain weak and easily revert.

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #45 on: September 15, 2017, 08:31:31 AM »
OP, I like to look at this as an odds / equity type of analysis. You are risking 50k to potentially gain 2k. This more realistically is ~1-1.5k after taxes, and lawyers fees, notary etc. Therefore your friend needs to pay you back (1-  1.5/50)*100 = 97% of the time for you just to break even (average profit = $0), and greater than that for you to make a profit in the long run making these types of loans. If you are 98% certain he will pay you back, your average profit is only a fraction of the $1500 you look to make. Only if you are 100% certain (which you can't be) does your average profit = $1500.

Also, the fact that you are not going to be making thousands of these loans means you are subject to huge variance (ie you could just get unlucky and lose the 50k). How much 50k is of your total stache also plays a large role.

If you can afford to lose the 50k, are willing to roll the dice on the 98-99% (or whatever you can REALISTICALLY calculate) chance you get paid pack, and are willing to risk your friendship over a couple hundred bucks in equity then go for it. I wouldn't.

Good luck!
« Last Edit: September 15, 2017, 08:34:58 AM by soontoberich »

undercover

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #46 on: September 15, 2017, 09:28:46 AM »
If $50k is a drop in the bucket to your financial status, I think you're better off just handing your friend $1k and calling it a day. $1k for you couldn't be worth the hassle of getting this setup and doing the amount of research you're doing. It sounds like you've been paid much more for your time in the past so I don't understand why you're even bothering. And $1k isn't really doing him any favors either.

To me it's not even a question of "should I do this from a risk perspective" like others are seeing it, to me it's "should I be doing this at all" - and for me that answer would be a definite no as the reward for time spent even thinking about it for 10 minutes isn't worth it if you're both in decent financial shape (he obviously is or he couldn't pay $50k in a year).

Sorry I don't have anything to add or any specific advice (I think you're fine as far as risk goes), it just doesn't make sense at a basic level to me I guess.
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Re: loaning a friend $50k, questions about how to do this properly
« Reply #47 on: September 15, 2017, 09:40:05 AM »
Thanks for the replies...I know you have my best interest at heart.

I can be a worry wart at times, and I don't trust people in general, but the more I have thought about this topic, the more at peace I am with it.  I definitely feel more than ever, there is no risk, and it's pretty amazing coming from me as I'm a pretty harsh judge of character of most people.

I will update on the compliance items for sure, that to me is the more interesting aspect of this. 
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Re: loaning a friend $50k, questions about how to do this properly
« Reply #48 on: September 15, 2017, 09:43:07 AM »
Thanks for the replies...I know you have my best interest at heart.

I can be a worry wart at times, and I don't trust people in general, but the more I have thought about this topic, the more at peace I am with it.  I definitely feel more than ever, there is no risk, and it's pretty amazing coming from me as I'm a pretty harsh judge of character of most people.

I will update on the compliance items for sure, that to me is the more interesting aspect of this.

1. Where are you getting the loan agreement?  Attorney?  You could post it here with information redacted and we can take a look. 
2. If there is no risk, why bother collateralizing?  It will only cost you and your friend money. The return is already pretty thin.

Valhalla

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Re: loaning a friend $50k, questions about how to do this properly
« Reply #49 on: September 15, 2017, 09:50:40 AM »
Thanks for the replies...I know you have my best interest at heart.

I can be a worry wart at times, and I don't trust people in general, but the more I have thought about this topic, the more at peace I am with it.  I definitely feel more than ever, there is no risk, and it's pretty amazing coming from me as I'm a pretty harsh judge of character of most people.

I will update on the compliance items for sure, that to me is the more interesting aspect of this.

1. Where are you getting the loan agreement?  Attorney?  You could post it here with information redacted and we can take a look. 
2. If there is no risk, why bother collateralizing?  It will only cost you and your friend money. The return is already pretty thin.
The loan document looks similar to this:  https://eforms.com/loan-agreement/  with some modifiers for collateral and some other things that are specific to our situation.

How does collateralizing cost money?   My friend offered to do it, and I said 'sure, to keep both of us honest'.  We are treating this as a business transaction. 
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