If you have loaned money to a friend, family member, or acquaintance and they haven’t paid you back, you’re not alone. Many people generously offer financial assistance to someone close to them, trusting that they will eventually be paid back, but then unexpectedly encounter difficulty when the loan comes due.
Collecting money from someone you know can be a delicate situation. There are unique considerations involved when a personal loan involves someone (and mutual acquaintances) that are part of your life. You certainly want to collect what you’re owed, but you want to limit any hard feelings and lingering resentment.
Most people aren’t naturally good at debt collection—it’s hard to know exactly what to say and how to appropriately pressure someone to pay you back. In this article, we’ll explore best practices when lending money to a personal acquaintance and what to do if the arrangement sours. If you feel like you have exhausted all of your options and are at a loss for what to do, this article will explore some potential next steps, including securing the assistance of a lawyer to send a collection letter on your behalf for a low flat fee.
1. Get it in writing!
You have probably heard this advice over and over again, but when it comes to personal loans of any meaningful amount, it’s important to get the terms in writing. More specifically, you’ll want to enter into a promissory note with the loan recipient.
The promissory note will clearly spell out the amount being loaned, the timeline for repayment, and consequences (such as late fees or additional interest) if payments aren’t submitted on time. A promissory note gives you a signed, legally enforceable contract that can be upheld in court if it comes to that.
While everyone knows that getting a loan formalized in writing is the right idea, the notion can be uncomfortable with family and friends. You want to show you trust the family member or friend and may worry that you’ll insult them by asking for a formal agreement. However, keep in mind that you’re doing this person a favor, and getting the loan in writing gives you basic protection that the borrower should be more than happy to oblige without making a fuss about it.
If the loan does go bad, you will have a much stronger case when you make your demand for repayment with written evidence outlining the terms of the debt. Besides, there are sometimes genuine misunderstandings between honest people about what the specific terms of a loan were. Instead of relying on casual verbal discussions or texts, having the loan terms clearly stated in a document helps both parties understand their obligations. You may even find that while drafting the loan document together, a term that wasn’t fully thought out before comes to light and is resolved.
2. Insist on payment and be firm (but understanding)
There are myriad reasons why a friend or family member may not have paid you back on time. They may have fallen on tough times, caught an unlucky break, or simply forgotten. Nevertheless, when it’s time for repayment of the loan, you want to be prompt about requesting repayment and be firm about it. However, you should be understanding at first if the payment is late—after all, they may have just needed a reminder, and you don’t want to jeopardize the long-term health of your relationship with this close acquaintance. You also don’t want to let the deadline slide without taking any action—that could send the message that deadlines aren’t important to you, and you have a forgiving attitude towards repayment.
3. Try to work out a mutually acceptable compromise
If the borrower is unable to pay you on time, and you believe they currently have no practical way of coming up with the funds, it may be a good idea to work out an alternative settlement. For example, you may want to extend the deadline for payment, forgo interest, or impose a late fee. Reaching a compromise where each side gets something in return is better than a stalemate with no movement towards a solution.
With family and friends, an important consideration is maintaining your relationship with the borrower. If there’s a reasonable debt settlement agreement you can mutually agree to, that’s much better than the next alternatives.
4. Send a formal letter
If you’re not making any progress towards a solution for repayment of the loan, it’s time to take more serious action. Sending a formal written request for payment can help establish that you’re drawing a line in the sand, and any further non-compliance could lead to more consequential action.
At this stage, this written request can take the form of a letter or an email, but it should outline the following:
- The amount of money owed;
- The fees and interest that have accumulated, and any late fees—if applicable;
- The total amount of money that is due to you;
- A detailed description of the reason for the loan;
- Reference to any written agreement, if applicable;
- The date payment was due and a new deadline for payment before you pursue other action.
Sending a more formal written request can help motivate the person who owes you money to take action. It can also serve to warn of potential legal action and provide you with additional evidence of your efforts to collect if you end up going to court.
5. Have a lawyer send a demand letter
A conundrum with lending money to a friendly acquaintance or family member is that if there’s an issue with non-payment, the borrower may feel you won’t take any serious steps to collect. Until now, your acquaintance may not have been taking your requests for payment seriously.
If it looks like your borrower is evading their duty to repay you, but you’re not yet willing to take drastic action such as filing a lawsuit, having a lawyer send a demand letter can be a great next step. A formal demand letter for payment will show the borrower that you mean business and will carry additional weight coming from a lawyer instead of yourself.
Demand Letters gives you a cost-effective way to have a lawyer send a demand letter on your behalf. For a low flat rate, Demand letters will connect you to a licensed professional that will send a letter to your borrower so you can get a personal loan repaid.
6. File a lawsuit
If your debtor still hasn’t paid you even after receiving a demand letter from an attorney, you have a couple of options. One option is to just let things be. That may sound very unappealing at first, but you must be honest with yourself about whether it’s worth the time and effort to file a lawsuit against this person and the potential fallout that might create not only with your relationship with them but with mutual friends and family members.
You may decide at this point you have done all you can, and spending money on a demand letter sent by a lawyer was your last-ditch effort to collect. If that’s the case, you may be upset and disappointed, but you can have some solace knowing you went as far as you were willing to go, and accept the loss and learn a lesson for the future.
If you’re adamant about being repaid and not willing to let the matter go, filing a lawsuit may be the next step. If the loan amount meets the threshold for your state, you may be able to use the small claims court system without the assistance of an attorney. However, if the loan amount is too large for small claims court, a legal professional can help you weigh your litigation options. Remember, however, that litigation can be long, expensive, uncertain, and messy.
You may want to consider how a lawsuit will affect your relationship with this person as well as mutual acquaintances. There are also no guarantees on how a lawsuit will turn out, even if you’re 100% confident that you’re right. A lawsuit can be costly and ultimately not turn out the way you anticipated. Every loan, every borrower, and every situation is unique. A good lawyer can advise you on how to best navigate your unique circumstance.
If you gave someone a personal loan and are having trouble collecting, Demand Letters can help. We will connect you to a licensed legal professional that will draft and send a demand letter for payment on your behalf for a low flat rate without any further obligation. Stop worrying about whether you’ll ever get a personal loan repaid and take action today.