Episode 5: How to Hold Your Debtor Accountable
The moment you lend out your money to someone, that person becomes your debtor and is liable to repay the money according to agreement.
Where the debtor fails to honor the agreement as when due, it is usually an awkward situation for both parties and more so to the lender because there’s a probability of losing a hard-earned money.
Nobody likes a loss. Therefore, it is on you as a lender to put modalities in place at the time of giving out the loan in other increase the chances of getting your money back. It is one thing to give out a loan. Getting it back is a different ball game because it remains the onus of the borrower to return your money. In fact, the borrower is under a legal obligation to repay the loan.
“It is on you as a lender to put modalities in place at the time of giving out the loan in other increase the chances of getting your money back.”
The legal definition of the word debtor is “one who owes another anything, or is under obligation, arising from express agreement, implication of law, or principles of natural justice, to pay money or to fulfill some other obligation.”
The problem is, many lenders and debtors fail to regard the debt transaction with the severity it deserves. They prefer to take each other by their words alone especially if the parties involved are close friends or family members. This explains why so many personal loans go bad and unrecovered and precious relationships go bitter as a result.
Never feel guilty or afraid to demand for greater accountability on how your loan is handled and when it will be returned. The banks, credit unions and other credit facilities don’t play with their money, so why should you?
When large amounts of money is involved in any debt transaction, it is advisable to be cautious, if not suspicious of your debtor. Yes, money can change anybody. You don’t need to take chances.
Without strong modalities in place to hold your debtor accountable, it is highly likely that you will lose your money.
In the last episode of this series, I wrote about the questions you should ask before lending out money. If you find that you are comfortable with the answers to those questions and you want to go ahead with the loan, the final thing to do is to have a way to hold your debtor answerable for the loan. You need to be certain that you are not just throwing your money to the winds.
Personally, if I were to owe someone money, I would make returning the money my topmost priority, even scrimping, saving, and denying myself certain pleasures. That’s because when someone loans money, I consider this an act of goodwill, and I would never want to betray this trust.
While I believe there are many people like me, we have to admit that not everyone thinks that way. In fact, many people see borrowed money as an opportunity to splurge. After all, they did not work for it.
So how do you go about this?
How do you make sure that your goodwill to your debtor is not trampled upon with impunity?
Well, you cannot completely predict or control people’s behavior especially when money is involved. But you can at least put some restraints and increase your chances of getting your money back.
“Never feel guilty or afraid to demand for greater accountability on how your loan is handled and when it will be returned.”
You can hold your debtor accountable by taking the following steps.
1. Decide How Much to Loan
After finding the answers to the necessary questions on whether or not to lend your money, you can then proceed to making the important decision of giving out the loan.
However, you should only go ahead with the loan if you are okay with loaning, and not because you feel morally obligated to do so or because you feel it is the right thing to do. Only say yes if you truly mean it. Money does not respond to emotions, it responds to results.
Also, you don’t have to loan the full amount the person requests, especially when you have some doubts about the money being put to proper use. This has a way of making the borrower to be more prudent with the money. It depends on your personal financial needs at the time and your relationship with this person.
Only loan the amount you feel comfortable with loaning. This is your money we are talking about. Do it because you want to, not because you feel like you have to.
Never ever let someone guilt you into lending money or more money than you are willing or capable of; it’s your choice on whether you want to lend and if yes, how much you want to lend.
2. Create a Written Repayment Plan
How many stories have you heard of people who lost money because they loaned it without agreeing on a certain date of return? How many times have you done that yourself?
The mistake many people make is think that they and their debtor are on the same page when it comes to repayment. This presumption often leads to regret – a situation that could have been avoided if they had a thought-out plan.
In the event that you find your borrower responsible and trustworthy enough to take out a big loan from you, always put it in writing. There is something about putting pen to paper that makes any financial transaction look serious and binding.
Memories fade, priorities get shifted and clashing opinions over what you originally agreed to can cause problems between friends or family, says Priyanka Prakash, a finance specialist at Fit Small Business and a former business attorney.
Draw up a payment plan and discuss what will happen if something goes wrong. Be clear about your expectations and realities. Don’t mince words.
In practice, a loan agreement should be dated and state the loan amount, due date for paying it back in full, the payment schedule and any agreed-upon late payment fee or interest. Full contact information for the loaner and borrower and both of your signatures, either handwritten or electronic, are important, says Prakash. It also needs to be signed by both parties.
A good repayment plan must answer essential questions like:
- When will he/she be able to repay you?
- How will he/she be repaying you? Bank transfer? Cash? Paypal?
- Will he/she be paying in full or in installments?
- Is there going to be an collateral? A collateral is a security or guarantee (usually an asset) pledged for the repayment of a loan if one cannot procure enough funds to repay.
- Is there going to be an interest charged? At what percentage?
You need to get the repayment agreement plan down in some form of writing, be it in text messages, email or printed word document so that there is some form of accountability. If you need help pulling a formal document together you can opt to search online for a promissory note template which states the promise to pay someone back and can help ensure that all the important details are covered.
3. Agree on a Late Payment Fee
An important part of the debt repayment plan should be a clarity on what happens if the debtor fails to meet his obligation at the due date.
Where banks are involved, this could mean a seizure of collateral. If collateral was part of your agreement, then you have to be very clear on the process of transfer of ownership.
Another alternative would be to charge a late payment fee on the loan where the debtor would have to pay the penalty on top of the regular payment.
You may want to agree on a few days of grace before the penalty kicks into effect. The penalty may be in the form of a certain agreed amount or a percentage of the loan adding up every extra day or week that the loan is unpaid.
Drawing up an official loan document with a due date and penalty makes it more likely that the borrower will take the loan seriously and pay it back on time. In essence, you are saying, “so if you miss a payment, this is the piece of paper that we’ll look at that’ll help us to decide what to do, so it moves the friendship out of the way”.
“Drawing up an official loan document with a due date and penalty makes it more likely that the borrower will take the loan seriously and pay it back on time.”
4. Get a Third Party Involved (Notarized)
Notarized means to be witness of the authenticity of a document and its accompanying signatures in one’s capacity as notary public.
Depending on the size and complexity of the loan, you may want to enlist the help of an attorney to help you draft up a contract and witness the transaction. In the event of a default, it will be a lot easier to get the matter settled in a court of law. You need to take emotions out of the deal and treat this loan as a business transaction.
This is great way to let your debtor know that you are prepared to take legal action if he tries to play smart with your money.
5. Never Let the Due Date Slide
If you don’t have a debt repayment plan, you’ll find that reminding or even asking your friend to pay you back will make things uncomfortable and awkward.
In a article on lifehacker.com, Nancy Rones wrote that if your money doesn’t show on time, ignoring the lateness or making excuses for not confronting the borrower would be a mistake. He might continue going along as if the due date you set is a loose guideline rather than a rule.
You have to make it more businesslike so none of you feels like you are taking advantage of the other. You can do this by sending reminders in advance to the due date.
It never hurts to send a reminder email, SMS or call a month or week in advance of the due date to show your debtor that you’re sticking firm to the terms. For example, “According to the agreement we signed, the loan I gave you will be due on October 25. I’ve attached an original copy, in case you’d like to refer to it. So glad I was able to help my good friend out”.
A reminder, in addition to the existence of a late payment fee is enough to put any debtor on their toes and keep them accountable to you.
In conclusion, unless you are giving out a freewill gift, you would certainly like to have your loan repaid on time. Therefore, it is on you to put these measures in place before (not after) lending out your money.
What if after doing all this (or your failure to do all this), your debtor still defaults and fails to pay you back? How do you move on and forget about the loan? How do you save your relationship from getting bitter?
In the next and final episode of this series, I will share with you on how to find healing after a lost loan.
Have you ever lent money to friends or family members? What was the experience like? Having read this, would you do it again in a more financially intelligent way?
I would like to know your thoughts, suggestions, concerns and questions in the comments below.