How to Make a Loan Using a Tax Return As Collateral

Personal loans have destroyed many friendships and relationships, so if a friend approaches you for a loan, you may feel safer obtaining a form of collateral. Although a tax return may seem like an unlikely source of collateral, this is perhaps the most reliable.

Step 1

Ask your borrower to bring his or her tax return from the last two years and most recent pay stub. This information will provide a fairly clear idea how big a tax refund your borrower can expect to receive.

Step 2

Take these documents to an accountant or tax preparer for an estimate of the refund size if you are unable make this determination. Be sure to take into account any changes in the borrower's income, deductions and credits.

Step 3

Write up a loan agreement that specifies the terms of the loan, including the amount, interest rate and the obligation of the borrower to repay the loan from his tax refund. Both of you must sign the agreement and have it notarized. Also, have an attorney review it and declare it legally enforceable.

Step 4

Wait for your borrower to receive the refund. If he has a bank account, have him use direct deposit. This will expedite the process by at least two weeks in most cases. Checks take much longer to process and mail.

Step 5

Hold an additional item of collateral from your borrower if you feel it is necessary. For example, if your borrower is in desperate need of $3,000 and can repay in 60 days from his tax refund, you could hold his second car for that time period. This could be particularly motivating for borrowing couples reduced to one car for the duration of the loan.

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