How to Give a Personal Loan

A person to person loan can be both the most satisfying and the most risky type of loan to give.

While you may have a personal investment in the business proprietor, that same friendship can make them incredibly lax when viewing your money with the same gravity as they would a bank loan. They know the bank will hand them their ass and care less.

So you've got to be incredibly careful when giving a person to person loan. Here's how to do it and make sure your investment has a chance.

1. Treat a person to person loan seriously by getting the right paperwork done.

   Hit up the Internet for the proper documentation.

   http://www.free-legal-document.com/promissory-note.html contains promissory note templates as well as security agreements, installment agreements, everything you'd need to set not only proof of a person to person loan, but method and timing of repayment.

2. Make sure your friend has a viable business before giving a person to person loan.

   Get documentation from your friend to assess risk.

   Make sure your person to person loan is not paying for the legitimacy of your friend's business. They should be correctly incorporated, have the proper licenses, and be registered with the Better Business Bureau (BBB) BEFORE you give them a dime.

   This initial investment on their part will show they have skin in the game and a dedication to the success of their own business. Never let your person to person loan be used to pay for these initial things.

   I also don't think it would be out of line to ask for a personal or business credit report before giving a person to person loan.

   Verify their documents like a bank would. You can say that it's so you can assess risk to know what interest rate to charge.

3. A person to person loan demands a business plan.

   After you check their credentials, ask to see a written business plan before giving a person to person loan.

   Tell them to write out exactly how they will use your money.

4. Keep up with your person to person loan after you give it.

   The last step to giving a person to person loan is to demand where your money is after you give it.

   In the agreements you sign, ask for a newsletter, or periodic update as to the status of your investment.

   Your friend will treat you and your person to person loan with much more respect if you ask for all these things, because he or she knows you care about your money.

Resources

• The Complete Idiot's Guide to Person to Person Lending