Avoiding Problems Along the Way
The best time to discuss the potential problems with a personal loan agreement is before terms are agreed to and signed. Both parties should have a game plan in place in case payments are delayed or the borrower wants to pay off the loan in advance. While families have all the rights of conventional lenders to foreclose, most of these loans are restructured or forgiven.
If a lender finds himself in a situation where competing investments provide a significantly greater return, a demand clause in the loan agreement will allow him to demand full repayment on the loan or renegotiate for better terms. This is obviously something both should discuss before signing.
There are other ways to deal with problems. Come up with a written action plan at signing. If you're the lender, you're well within your rights to specify a list of penalties or actions that must be undertaken if the borrower is late with payments or defaults. Consider the following:
Forgive any missed payments and make up to $12,000 of those missed payments as a gift based on the 2007 IRS gift allowance.
Agree to a repayment schedule based on a certain number of missed payments.
Decide how the rate, loan type, or payment schedule might change if the borrower is late or defaults.
Personal loans begin with an act of generosity, but those made with formal terms impress upon both sides the importance of meeting the agreement. Family and friendships can be destroyed by money — that's why such agreements are necessary.
