Recently when a kid wanted to borrow Rs. 20 lakhs, he went to a bank but got bad rates of interest. The documentation was painful, and the family was not sure whether it was the right thing to do.

A rich uncle – actually his dad’s younger brother (kids chacha) offered the loan at exactly the same terms as the bank – but without very complicated documentation.

The uncle asked me the following questions:

1. Can I afford the cash flow: the answer was a resounding yes.

2. Can I afford the loss: again this amount was about 1% of his net-worth, so was not an issue.

3. Is the interest fair on both the parties: My argument was yes.

I had some more questions like:

– how will you react if he does not repay?

– there is no tax exemption for him, find out how will he react if he knows that?

– after repaying a portion, IF HE WERE to drop dead, how will you react?

– if he stops paying after say 3 years, what will you do?

– if interest rate changes for companies, how will you react?

There are many such imponderables for which we do not have an answer, so what to do….?

Search me.

If you are doing private deals…inagine the risk that you are taking 🙂

 

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  1. ALL private loans are unsecured and usually done for partly/wholly sentimental reasons. For this reason they must be written off immediately on release of funds (its charity by another name). Zero expectation. If it comes back, it is a good check on the integrity of the borrower(at that point of time).Unless of course its an underworld dealing where the interest cost is not just to be counted in monetary terms!

  2. I gave 20K to one of my close frnd who needed that only for 2 weeks..
    He gave 10K back after 6 months, 5K after 18 Months, 4K after 22 Months.. 1K still pending…which I dont expect to be retruned at all 🙂

  3. Dheeraj you should not feel bad about the 1k. You should feel bad that you looked like you will give and you gave. Borrowers choose the right bakra.

  4. If I tell you the truth.. I have given him money like this many times in past as well.. and he used to returned within 6-8 months…Only this time.. he extended too much..
    Being a childhood frnd (since 4th class), I could never said no to him..But I think I should start doing that now…

  5. A saying in marathi means ” if you transact with relative/friend you have to let go either one of them i.e your relationship or your Amount “

  6. I couldn’t agree more Suhas.

    Dheeraj, it is better that the relationship is lost before the money is lost than after it. If people have the right to ask you money, you also have the right to politely say “NO”.

    btw did Subra sir miss this in his earlier post on the need to say NO.

  7. i think donating 1% of net worth to charity is quite fair & that is exactly what this gentleman is doing.
    at best, he can extract a promise from the kid that he will do the same for someone else deserving when his turn comes.

  8. Param bro… my son is one step ahead of me..
    he oftenly gives his belongings to others in school and our neighborhood.. 🙂

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