Person to Person LendingPerson to person lending is probably the oldest form of lending. Decades ago, person to person lending could be solidified with a spit in the hand and a solid handshake, the man's promise to return whatever was borrowed. This type of lending is based on trust, honor, and the ability to keep a promise. Although person to person lending might seem simple, it is likely an area that people fail to fulfill their duty to repay their debt. Oftentimes, person to person lending occurs within families. Because family dynamics have the ability to get in the way of imposing consequences for breaking a contract, there are many folks that do not get their monetary or property return. On the flip side, there are many other times when person to person lending among families works out just fine and money or property is returned or repaid within the agreed upon terms with no problem. This positive follow through establishes trust and credit, just as it would with a bank or other lending institution.
With all forms of borrowing and lending, it is important to adhere to the terms of an agreement and repay accordingly. It is easy for some people to minimize person to person lending as something less professional than a bank transaction because the actual transaction may be so much more simple. The handing over of a check by a grandmother or father seems less conspicuous than filling out all the papers at a brick and mortar financial institution, but both are equally important. There are also wealthy people who dabble in peer lending as a way to make more money. They are able to finance projects, etc., and then gain a return on principle plus interest.
There are a few other terms for person to person lending. It may also be called social lending or peer lending. These terms simply imply that there is a transaction or establishing credit with a person instead of an institution. Personal lenders should use a contract form when acting as a credit agency, even if it is with family members. Even when people know one another it is still important to lay out the terms of the loan, so that both parties adhere to the terms. This also assures that all parties involved are very familiar with the consequences of not following through with return. Some person to person lending involves attaching interest, so putting this in the contract and determining the exact amount of money that should be repaid is extremely important. Just because the monetary transactions are occurring between two or more people does not make it any less important than a bank's transactions. Of course, the amounts or items that are being loaned out also affect the seriousness of the matter and whether or not personal contracts need to be written. It is a good idea for the lender to always write a receipt for the borrower. Both parties should have a copy of the receipt and it can serve as proof if ever needed.
Although contract law does set forth guidelines for some verbal agreements, it is much harder to enforce the terms of the loan and get money returned when paper contracts are not used. The backbone of any agreement is having it in writing. It may also be important to have a witness. One of the most common forms of fraud is committed between family members who prey on their elderly. It is a mistake to think this will only happen to someone else because it happens too easily and too often. An easy and frequent starting point of elderly abuse fraud happens through person to person lending. The lender, who perhaps should not have been negotiating financial terms on their own, can easily be taken advantage of, so that is why the witness is so important, especially when large sums of money are involved.
All in all, person to person lending can be a very simple or complex process depending of the terms. If it is problematic then paperwork and documentation becomes important. One of the best things about person to person lending is that it allows people to buy things they otherwise would not have been able to have had they only had traditional financial institutions as a borrowing option.