I have a friend who is 10k in debt and I offered i'd help him out if he pays me back 11k. Right now he is being charged 27% interest so i'd be saving him money, and be making money at the same time.

Has any one ever done any thing like this? If I get a contract and get it notarized how much risk am I incurring? Basically he is forced to pay me each month like a credit card bill, except the money goes to me right?

I mean this is basically what the banks do correct? I'm just doing it at a lower interest rate.

In my opinion friends and money don't really go together all that well unless you know he's absolutely good for it. I mean if bails out on it, then you're out 10k and a friend as well.

I have done things like this and it has gone very poorly. It's especially a bad idea if it's a friend you would like to keep.

$1,000 isn't worth it.

generally people 10k in debt paying 27% interest arent credit worthy.

This is going to end badly.Money and friends should not mix.

From a purely financial perspective it is a stupid idea. There is a reason he is paying 27%. You are coming in asking for $1000 but did not mention the time-frame. Makes a big difference if it is 1 year, 2 years, or 3 years for him to pay you back. For 2 and 3 years it isn't even in question that you could find an alternative with less risk and a higher return. For one year it would almost certainly be possible as well but at least it would be open to debate. So even if we ignore the fact that this will end badly as a business decision it is a stupid idea as well.

The same risk as the banks are incurring... And they have decided that the risk requires 27% interest to be worth it.

It is technically possible that you personally, because you might know your friend better than the bank (the bank would have to spend a huge amount of effort on investigating your friend, while you already have this information incidentally from being his friend) are able to discern factors that make your friend more creditworthy than what the bank decides he is, and the 10% interest pays for the risk.

But while it is technically possible, it is very unlikely. Majority of the time when people do this, it is because of an emotional connection with the "friend" that causes you to overestimate his creditworthyness, or feel an obligation, and enter a horrible business transaction. People tend to extrapolate the workings of their own mind onto others. Even if you are responsible and good for your debts (which most people would have to be in order to be in a position to loan money to others), you are making a mistake if you extrapolate it to other people. Because most people aren't. Why did he take such a horrible loan in the first place.

I have done two similar transactions for around $1K each (which for me was probably a similar amount as $10K is for you; realistically I would be able to sustain earning perhaps $500 a month). One went smoothly. The other one wasn't horrible, but there were problems. I did it partly because I was too idealistic, and partly I genuinely accepted that it was bad business but I sort-of wanted to see what happens. Or maybe I sort-of wanted a justification to hate people. Whatever, next time when someone asks I can say with honesty that I have had not so good experiences with this kind of thing. I don't intend to ever do it again when I know it's bad business.

But arn't they forced to pay you if you have a contract? How can they get around paying you? They are forced to pay you monthly right?

I think you have way too much faith in contracts. If someone chooses to not fulfill their obligations under a contract magic enforcement fairies don't suddenly materialize. You would have to sue your friend which is time consuming and frustrating. That will only get you a judgment which you'll then have to enforce and again that is a pain and it presupposes that the individual is not judgment proof which is rather likely for someone who would get involved with something like this.

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what will you do if he doesn't pay. Even a man with a gun to his head doesn't always have the cash. forced to pay you, don't be this naive with $10k please.

Very bad idea.

I will just note that the exact same applies to banks, yet they have estimated that 27% interest is necessary to justify the risk.

What makes it any different to you than to the bank?

I am in a situation where I gave my friend a loan (who is 100% good for it) 17k. While I got very favorable terms, he has had trouble paying the interest so as a result we had to freeze interest for a couple months and now he wants more money (25k more and Im not completely comfortable lending him that much). My point is, he used our friendship to subsequently alter our agreement and give him better terms. I dont fault him for it but looking back I would not have done it if the agreement was going to be changed although our friendship is still intact, im not thrilled.

Cliffnotes: dont loan to friends, even if you get favorable terms because it could 1) hurt the friendship, 2)he could use the friendship to alter the terms, 3) could force you to go outside of your comfort zone because of your friendship.

I'm curious why you say he is 100% good for it when he has in fact defaulted on the loan by not living up to the terms of the original agreement. Also, are you actually considering lending him more money?

I also fail to understand why you think he is good for it. He couldn't pay the interest and he wants more money. There is nothing in the information that would indicate he is good for it.

What does he need the $25k for?

Cognitive dissonance, but the friendship is still intact (the same way the bartender always remembers your name, cash talks)

I've been on the other side, needing a loan to get out of high interest rates when I was young and stupid, and it worked out well for the both of us. However, I don't think it works out in the majority of cases.

Today, I do see friends in a similar position and it makes me really wish there was a business idea in loaning money to friends, cutting those interest rates in half and everything working out. 25% + just isn't fair.

so much this. that rate in and of itself should tell you all you need to know here.

Another vote for the "don't do this" camp. This is coming from someone who lent a friend $3500 12 years ago, and never saw a cent (we're no longer friends as you can probably guess).

did you sign a contract and get it notarized?

I don't want to derail the thread too much, we have known each other since middle school, I have loaned and staked him this amount in the past and he has always paid up, and I know he has a savings account with 50k in it that he doesnt want to touch (hence the loan). Technically he has not defaulted on the terms of the current loan because I agreed to freeze interest payments for the time being because the interest was 1.5% a month and we didnt forsee the loan going this long (it was supposed to be three months, its been 8), and I didnt want to charge him that much long run so I agreed to a temporary freeze.

Although I know he has the money even if I loan him the additional 25k if things go really bad, he will pay his debts (if he doesnt his parents will because they are extremely wealthy) I am not that comfortable lending him an additional 25k because I forsee that it might create additional problems. I do not want to be charging him such large interest payments every month on a considerably bigger principal. I think im going to propose for him to use his 25k to play live poker instead of loaning him any additional money, and as a deterrent I might say that I wont take less than 2% a month.

The main purpose of my post was to show that even if you have a great deal in place initially with loaning a friend money you are in a tough spot if they claim changed circumstances or hardship.


Note: I didnt make clear that the 10k was a poker related loan on full tilt which was frozen on full tilt after black friday and the rest was loaned to him in cash which he lost playing live under rolled. The 25k would be an additional loan to play 5/10 live, he is a very good player.

Give your friend $10k. Tell him he doesn't ever have to pay you back.

If you aren't willing to do that, you should know the answer already...

I am also in the "don't do this" camp. While this may work out okay for you, it is usually not worth the risk (or hassle for that matter). If you are totally okay with losing the 10k (think of it as a gift to help out your friend), then go for it! As an investment, I do not like this idea for many of the reasons stated earlier in the thread.