People are commonly confronted with requests from friends or family members to loan them money. While these requests are common, some may wonder whether it is legal to loan money to others. Simply put, yes, it is. You can loan money to others as you see fit. However, each state has its own laws governing money lending and even if these laws don't apply to individuals you should still talk to an attorney if you need legal advice about lending money.
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No state or federal law makes it illegal to lend money. While there are many laws that apply to institutional lenders and other businesses that loan money or provide loans or credit, you have the right to lend other people money as you wish. You can, for example, lend your sibling money to buy a new car. Whether you need to sign specific documents or take certain steps depends on the details of the loan.
Interest and Security Agreements
While you can lend money, you may have to take special steps if you want to charge interest or take collateral. Every state has laws that limit how much interest you can charge when giving a loan. These usury laws differ by state and have wide differences. If you want to give a loan and require the borrower to give you collateral, you should create a special kind of transaction known as a security agreement. Laws apply to these agreements as well, such as requiring you to list your name on a car title if you take a security interest in the car.
In general, you can lend money in any way you wish. However, verbal agreements offer a lender the least amount of protection if the debtor defaults. At a minimum, putting the terms of the agreement, including terms of repayment, in writing offers better protections and makes it easier to prove the agreement in court. Other options, such as a promissory note and notarizing the agreements, are also available.
What happens when your lend money and the debtor fails to pay you back? Unlike an institutional lender, individuals have limited resources and experience when it comes to collecting on a debt. If the amount of the loan is relatively low, you can take the debtor to small claims court. Every state has small claims courts in which you can represent yourself and parties are not allowed to be represented by an attorney.