Borrowing Money From Friends: 7 Rules for Success

Lending money to friends or even borrowing money from friends is a tricky situation to be in. We’re going to share some tips to make this pain-free.

Using short-term finance is everything we’re against here at The Debt-Free Community. A good recommended alternative is to knock on the doors of your friends and family.

The question is though: How do we manage this sensitive situation? After all, you’ve enjoyed many great memories together and now this happens.

How to borrow money from friends

It’s easy to borrow money from a friend to pay bills and other debts, provided you actually do your homework first. Don’t take this situation lightly. Even if it’s just a few hundred dollars, you’ll want to make sure you’re doing the right thing by them.

How to borrow money from friends

I recommend following these guidelines:

1. Have real documentation in place

What you’ll want to do is have an actual loan document in place. While it’s not necessarily a legal document in place, it’s more than just a handshake between people.

Go and create some basic terms of the agreement. This will include:

  • The total loan amount
  • Interest that has to be paid
  • Frequency of repayments
  • Any penalties for missed payments

We would recommend that you simply stick to the repayments. If your friend has been kinda enough to lend you money, then don’t tarnish the relationship. An option is to create scheduled payments from your bank account into theirs.

2. Aim to pay off the loan early

You can surprise your friend that you borrowed money from by repaying the loan early. Not only is this going to keep you on great terms but also gives you a significant advantage if you need to borrow money again.

This doesn’t mean you need to slave away, but if you can pick up additional work on weekends or evenings, then this can really help. They will see that you’re a person of your word.

3. The loan must have interest

While many people are nice to each other and will gladly lend money without interest added on, we recommend that you propose that the loan has an interest rate attached. Why? Because an interest-free loan is a gift and you’re taking a risk.

After all, no bank in Australia is going to give someone an interest-free loan. For personal loans, the rates are 10% to 17% while payday loans can be around 30% which we don’t recommend.

Given that you have a friendship, we recommend choosing an interest rate in the 5% to 10% range. The lender (your friend) gets to earn a return on investment while you have the satisfaction of knocking you’re helping them out, and they’re helping you too!

4. Only the friend who’s lending can negotiate

If you’re the person who wants to borrow money from a friend, then they really have all the power. Without them, you’re probably not going to achieve anything and might have to do a payday loan (bad idea).

Let’s say they offer $3,000 AUD while you really need $8,000 to replace your car. We would recommend that you simply accept the $3,000 for now and look at other options too. Do you have another friend that you can borrow some money from?

You can’t negotiate the principal amount of the loan between friends and you can’t negotiate the interest repayments either. That is, unless you’re the person lending the money.

5. Avoid the common borrower red flags

There are certain red flags to look out for if you happen to be that person lending money to a friend. These can include:

  1. Have they had debt collectors come knocking recently?
  2. Do they have safe and stable employment, or can they get another job ASAP?
  3. What is the state of their house and car? Is it clean or simply one big mess? (Messy homes are a tell-tale sign of someone failing at more than one thing)
  4. Has anyone told you something about them that you should know?
  5. Look through their Facebook and Instagram feeds for anything that might spell disaster
Borrowing Money From Friends
Monthly budgets: This is how families work towards a debt-free living in Australia

Often your friend has probably been declined a loan from a bank before, which in itself is a red flag. They might have several debts that they’re trying to pay back at once.

6. Consider alternative borrowing options in Australia

Long before you ask your friend or family member for a loan, look at some other options. Are you taking out a loan to pay off existing debt? If yes – you might qualify for a debt consolidation loan where you will be able to save money each and every month.

A good option is Peer-To-Peer lending services like Prospa. These guys help people create a better return on their money than the bank will give them while allowing you to access cheaper interest rates.

Can your boss pay a bonus early? Some might be open to the idea if you’ve proven yourself at work.

Can you sell some of your used stuff on Gumtree Australia instead of borrowing money from a friend? That is often the best idea to raise some quick cash today.

Another good one is merely creating a good personal budget each and every month. Likewise, consider the gig economy with opportunities to drive for Uber right on our fingertips.

7. Remember that it’s still a friendship

Your friendship has probably been nurtured over a number of years. It’s a very strong bond that you have with someone which shouldn’t be tainted through taking out a loan between parties.

This makes it complex, which is why we recommend proper loan documentation. As long as repayments are done on time each month, then the details of the loan don’t need to be discussed. In other words, you can just enjoy social time together.

Often relationships are ruined because someone wanted to borrow money from their friend, and unfortunately, it wasn’t paid back on time or even paid back at all. Stacking a financial relationship with a social one can be a tricky situation to manage.

In summary

If you’re the borrower, then consider this article to be a code of ethics that you’ll want to abide by. You can either print this off or remember the details.

You will need to have some documentation created. Some mere messages between yourself and your friend is not enough to create a legitimate loan.

If they’re kind enough to lend you money, you should be motivated enough to get your ducks in order. They will trust you more and be more willing to help you further in the future, financially or otherwise.

Many people are interested in debt-free living. Get in touch with us today and let’s see if we can assist you!

What is a Part 10 Debt Agreement?

A Part X / Part 10 debt agreement is where you can enter into an arrangement with your debt collectors without entering bankruptcy.

Otherwise known as a Personal Insolvency Agreement, people often use these to get relief from their debt obligations. Not only that, but they allow much greater flexibility for the individual.

How Part 10 Debt Agreements work

To enter into a Part 10 Agreement or Personal Insolvency Agreement (they’re the same thing) is sometimes a complex process. Let’s break it down for you:

  1. You need to be living in Australia or at least have a regular connection with Australia.
  2. All debtors must be insolvent
  3. You can’t have proposed any other Personal Insolvency Agreements in the previous 6 months unless the Court has given you permission.
Part 10 Debt Agreements

Next you’ll do this:

  1. Engage a Controlling Trustee
  2. Prepare a statement of affairs. That is your assets, liabilities and other personal information like where you make your income
  3. A complete draft version of the agreement where you outline the terms that you’re proposing to your creditors.

These documents will be forwarded tot he Australian Financial Security Authority by the Controlling Trustee. You’ll have to sign a Consent to Act document giving them the power.

Let’s look at some common questions:

Will this affect my credit rating?

Yes – entering into a Personal Insolvency Agreement or Part 10 will negatively affect your credit rating. Fortunately, it’s not as bad as a complete bankruptcy and you do stand a chance of getting a car loan in the future.

Can I lose my house over this?

The only property that is included in the Personal Insolvency Agreement are included and liable for the loss. If you don’t declare your house on the agreement and your creditors are happy with your proposal, then no, you won’t lose your house or be forced on to the streets.

Am I able to still run a business?

Yes – you can make regular income through a business like anyone else. The only exception is that you can’t be a director of a company whilst under the terms of a Part 10 debt agreement. Once the restriction is lifted, then ASIC will give you permission.

In summary

Part 10 debt agreements are a viable alternative to complete bankruptcy, provided you’ve exhausted all other options. These are becoming quite popular in Australia.

Have you spoken to the National Debt Helpline? It’s a free service that’s run by the Australian government. You can call them on 1800 007 007 for unbias advice.

You might also wish to reach out to us here at The Debt-Free Community. πŸ™‚

What happens to your HECS and HELP debt if you die

HECS-HELP when you die

Australia is the lucky country with the HECS-HELP scheme providing our local students with government-backed loans, but what happens to when you pass away?

This is a different type of debt than just about any debt out there. This is because it isn’t issued by a typical bank or financial provider, unlike all others. Not only that, but it’s based upon your actual current income, not what’s left on the loan when you die.

Often, your HECS-HELP Debt becomes $0 when you die. You don’t owe anything and your family members won’t be chased by the government for repayments.

That’s one very fortunate situation to be in.

Current HECS and HELP loans

When you die, the Trustee for your Estate will file any outstanding tax returns. Unfortunately, if the earnings for that year is reached then they will need to make payments out of your estate for that year only.

They will tear up your HECS-HELP debt when you pass away

That payment will be made and all future years will be written off. That is – the case is closed and everyone moves on, with no one liable to pick up the payments.

So you might be liable for a little bit to pay there. The current threshold for making those repayments is $54,869. If you die when living overseas, you might get an exception for repayments, even if you are still alive.

Changes might be coming

The Australian government has proposed a change to remove the debt write-off rules currently in place. This is because they believe that the cost of higher education continues to rise too high.

Basically, if your estate is worth more than $100,000, then what they’re saying is that you might have to pay back your HECS-HELP debt. This is a proposed change and nothing official has come from it yet.

It’s a very controversial topic and personally, we’re not a fan of it. We believe that at such a sensitive time, the Australian Government shouldn’t be reaching into your pockets for money after you’ve passed away. You’ve already paid a fortune in taxes.

In summary

We’re a big fan of the debt-free lifestyle here, hence the creation of this site. Certainly, we’re against taking out most forms of debt, especially payday loans.

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This post shares the characteristics of debt-free people

Now, if there’s one debt that we can advocate you take out, it’s actually HECS-HELP debt. This is because the advantages for your career are significant and currently, if you do die, then the debt will be written off at the time of death. It’s unlike pretty much any other type of debt.

In other countries, it’s a different situation where your friends and family will be chased. But we’re in Australia and we’re a lucky country.

Judgement Debts: What Are They and What Can They Legally Do?

Judgement Debt

If you’re struggling with judgement debt, then let’s look at some good options that can help you during these difficult times.

You’re probably doing it tough right now like many families in Australia. The financial burdens have taken its toll on your life and you might have been served a notice to attend court.

We’ll help you understand what are judgement debts and what you can do about it. The Debt-Free Community provides free advice online.

We firstly recommend you talk to a qualified legal and/or financial advisor who can help you personally during these challenging times.

The advice we provide here is very general in nature and isn’t legal advice.

Judgement debts Australia

In Australia, there are occasional situations where you might be served a judgement debt. They will need to be served to you in person by a Sheriff.

So, what are Judgement debts?

In short, Australian judgement debts are where you’ve been taken to court and they have decided that you definitely owe the debt collector money. Now you need to cough up money for them otherwise there are severe penalties if you ignore this. Treat this as very serious.

Judgement debts Australia

You have or about to have the above situation take place. This is an official situation where you are being summoned to court.

From some demanding letters and phone calls to this. Now you can’t escape.

Ignoring the judgement situation

We don’t recommend that you ignore the severity of the situation here.

Such issues can arise which include:

  • The Bailiff can force entry into your shed or garage to take or sell some of your personal stuff (excluding bedroom or kitchen furniture, tools of trade (up to $500) or stuff which isn’t yours). Imagine arriving home one day to see your garage is completely empty!
  • They can serve a Garnishee Order where your weekly pay which would normally go into your bank account instead goes into the account of your debt collector. This can leave you with such little funds to live on.
  • They can order the sale of your property if the debt is more than $3,000.
  • Creditors can apply to Australia’s Federal Court and have you declared bankrupt if the judgement debt is greater than $2,000. That’s scary!
  • You might receive an examination summons where you have to go to court and explain your income and assets. If you don’t show up, then guess what? The police can drag you to court.

Those are indeed serious consequences if you ignore the severity of the situation. Judgement debts aren’t your debt collectors simply calling you up day and night. The collection activities have moved way past this and you need to do something now.

Settling the judgement debt

There are ways out of this mess. The National Debt Helpline can help you with professional help on 1800 007 007 if you want some assistance here.

A good option sometimes is to owe up to the Local Court that you indeed owe some money. It’s an easy option and you can ask to pay the collector by instalments. It’s likely that you’ll need to supply details of income and assets.

If they agree, then you need to keep up with the agreed payments. Remember: They gave you a chance and it’s them doing you a favour, not the other way around. You will still have additional interest charged on the debt, but this beats going bankrupt. You’ll probably have additional legal fees to pay too.

Some people have other debts which put them into challenging times. If this is you, then look at some options which The Debt-Free Community talks about. You might want to contact us to look through options available today.

Regardless, there is a strong likelihood that this will affect your credit rating in Australia. Right now, that’s not that important. Taking action and doing something about this is important and you need to pull your finger out.

Judgement debts: In summary

We wouldn’t recommend you ignore this as it’s a legal process you’ve now entered into. Police involvement is something that can and might happen, including arrest at your house or workplace.

You don’t need to deal with that stress. Work out a payment plan with the debt collector and stick to it. They’re probably giving you the last chance that they can.