Loan shark issue

[mr friendly guy]

So I have a loan shark problem. And I have somehow found myself being the loan shark. Sort of.

It might be best to start from the beginning. At around march of this year while overseas I received a text message from a colleague. We aren't friends but at work we get along well. Apparently he had sent numerous text messages to other people asking for financial assistance. He offered to pay back with interest of 50% within 2 months. Naturally I was curious. It wasn't clear what type of problem he was in, but I figured being a foreign doctor he most probably had money stuck in a foreign bank and with stupid bureaucracy stopping his transfer (I had a colleague who had this problem a few years ago) and he most probably needed a short term loan. Otherwise how could he be confident to pay back 50% in 2 months. I told him I will get back to him when I arrived back in Australia.

Once I got back I found out exactly the nature of the financial trouble. He had invested in Forex, one of the most risky form of investment. And to top if off, he invested in the Japanese Yen. Since they're printing money in Japan, the Yen kind of have tumbled over the mid term, although I suppose he could still make money from short term fluctuations. I am going to assume he is betting that the Yen goes up relative to the Australian dollar, because I can't see the point in betting on it going down unless you use another currency, and then you have to lose more money to money changers changing that other currency to the Australian dollar.

Now he had arranged some type of loan, I assume its a margin loan and a margin call is coming. He needed money to stave off the margin call and he was hoping each person would lend him $10,000 AUD. Needless to say I balked at that figure, but I offered a smaller amount of $4000. I figured

a. Never invest more than you're willing to lose
b. As a hospital doctor he would be able to pay that off within a few months easily, and since I would have lent a small amount, I would most probably get paid back first (which was true).

Anyway, he accepted this deal and then 2 months later I found out he couldn't make the margin call. He did pay me back the principle (1 week later, but not a big deal) but asked to hold off the interest. He borrowed heavily from friends, who are just willing to accept the principle back and not interest. Apparently he had already consolidated the loan, is finishing off his house, has a wife and kids and the bank is not willing to lend him more. In desperation, he quit his hospital job, cashed all his leave and worked for an after hours GP service where you drive to the patient's house. Said service pays you $150 / hour (ie like 2.5 times what a hospital doctor of his rank would most probably get) and he managed to get a second job elsewhere. In case you're wondering how I know that service pays that much, I have a hospital colleague who does it on the side, although it can be risky, since some of those places your visit are hell dodgy. I myself do some jobs on the side with a rival service, less profitable but we get a driver so its safer (and colleagues have been attacked before with driver by drug seeking patients). But I digress.

According to him the debt is spread out around 150 k to the bank and 150 k to family and friends. Strictly speaking he could just focus in on paying the other non bank creditors and just pay the interest to the bank. At that time I told him I will check back within 3-6 months, because I kind of liked the interest. From a pragmatic stand point, he most probably would not be able to pay even if I insisted (and I do have mobile logs of our SMS as well as email replies). Plus it sounded like he was really down, 2 dependents, and my only 2 dependents are MMORPG characters, so yeah I decided not to be a dick and told him I will check back in 3-6 months.

Fast forward to 4 and a half months later, I asked him how he is doing. It turns out those jobs are quite a money earner, he has managed to pay off $125 K out of the total $300 K. This is in 4.5 months, and presumably according to him, most of it goes to pay off the debt.

I am sort of leaning towards asking when he will be able to pay my $2000 interest. I know some others still haven't got their principle back, but if he can pay off $125 K in 4.5 months, $2000 should be easily doable.

Thoughts?

[bilateralrope]

It sounds like he intends to pay you back, you're just not his highest priority. I'd suggest keeping track of the interest accumulating on your loan to him and check back on him in another 6 months or so.

[mr friendly guy]

Well I wasn't planning to ask for more interest than the $2000. Even if its a year away, that's still 50% in a year. How many investments net something this good? I can sort of see why loan shark companies exist in some countries, UK I am looking at you.

[Simon_Jester]

The obvious problem you face is, exactly how do you propose to ensure that you are ever repaid? The single most crippling kind of risk a lender can take on is "credit risk:" the risk that the borrower won't be able to repay.

Banks put a lot of time and effort into figuring out the answer to this question. Which is why they have lawyers draft elaborate contracts, make sure they're in compliance with local laws, and generally only loan money to people who are likely to repay.

It doesn't sound like you did your homework on that level. And while "but he's my co-worker" sounds like a great way to be sure he'll pay you back, it's really not. We're talking thousands of dollars here. A lot of people will decide "you know, that random acquiantance's respect and goodwill is worth a lot to me, but it's not worth four thousand dollars," and simply not pay you back.

As Zelazny put it, "Any man would be forsworn to gain a kingdom."

If I were ever to loan that kind of money to a friend, it'd be because I know on a gut-deep level that they have a sense of personal integrity you could break rocks against. And even then I'd be accepting, implicitly, the risk of never seeing that money again. I certainly wouldn't be kidding myself about making a pile of interest, because anyone I respect enough to personally loan money to is someone I don't WANT to take interest from.

So maybe you'll get lucky and get all this money you were promised. But I wouldn't bet on it. And if you're actually worried about what happens if you don't get the money back... start taking serious inventory of just what you propose to do if he refuses to pay.

[mr friendly guy]

The obvious problem you face is, exactly how do you propose to ensure that you are ever repaid? The single most crippling kind of risk a lender can take on is "credit risk:" the risk that the borrower won't be able to repay.

Just to clarify, the principle of $4000 has already been repaid, so I think the interest (of $2000) eventually will. The question though is it appropriate to ask for it now given others have still not even got their principle back.

It doesn't sound like you did your homework on that level. And while "but he's my co-worker" sounds like a great way to be sure he'll pay you back, it's really not. We're talking thousands of dollars here. A lot of people will decide "you know, that random acquiantance's respect and goodwill is worth a lot to me, but it's not worth four thousand dollars," and simply not pay you back.

Well I have things all recorded. I suppose theoretically I could take him to a small claims court, but hardly seems worth it given that in one pay day we easily earn more than that.

If I were ever to loan that kind of money to a friend, it'd be because I know on a gut-deep level that they have a sense of personal integrity you could break rocks against. And even then I'd be accepting, implicitly, the risk of never seeing that money again. I certainly wouldn't be kidding myself about making a pile of interest, because anyone I respect enough to personally loan money to is someone I don't WANT to take interest from.

Ah, that's the thing. I suppose I could be accused of being like a Ferengi, but generally I am going to say my real close friends would think more like me. Philosophically, with monetary compensation, its pretty up front what we get from each other. This only applies to large sums of money. For smaller sums for example, I would pay for one meal, and my friend would take turns the next time we meet. Occasionally we would treat each other to food without expectation of having the money returned, but $4000 is a wee bit more than that, and I think my friends would understand the principle of lending in economic terms - that is I forego using that money for something else, thus I should be compensated. If I ever needed $4000 from a friend and the bank would not lend it to me, I would offer to pay interest, although not 50%. Its just the concept of paying your debts which is like an integral part of me.

So maybe you'll get lucky and get all this money you were promised. But I wouldn't bet on it. And if you're actually worried about what happens if you don't get the money back... start taking serious inventory of just what you propose to do if he refuses to pay.

The thought did cross my mind, although the more likelihood is that it would take a while to do so. From a money perspective, there isn't a reason why he can't pay back given time, unless he engages in more risky investment. This was even before I found out how much after hours GP services offer, just based on the contracts showing how much doctors get paid annually.

[General Zod]

It sounds like you've got a couple of options. You can either take him to small claims court or you can eat the loss and learn your lesson about lending money.

Incidentally can I borrow about $5 grand? I got this hot tip.

[mr friendly guy]

It sounds like you've got a couple of options. You can either take him to small claims court or you can eat the loss and learn your lesson about lending money.

Incidentally can I borrow about $5 grand? I got this hot tip.

In case it wasn't clear, the principle had been repaid, so there is no loss as such. He just couldn't afford to pay the interest back at the same time, so I opted to hold off demanding it at that time. However I am wondering whether its worth asking for the interest now when others still haven't been paid the principle, on the grounds that the interest owned me is much smaller than the principle he owns other people.

[Crazedwraith]

It's totally appropriate to have a discussion with him and about how and when he's going to pay back. Agree something. Get it written down and hold him to it.

It sounds like he's not hurting enough that he can't pay back. Perhaps let him pay in instalments rather than a big lump sum?

[FireNexus]

It's probably illegal to charge that much interest, so you have no recourse. Don't do it again, and move on. You'll never see the interest, nor should you.

[Simon_Jester]

The obvious problem you face is, exactly how do you propose to ensure that you are ever repaid? The single most crippling kind of risk a lender can take on is "credit risk:" the risk that the borrower won't be able to repay.

Just to clarify, the principle of $4000 has already been repaid, so I think the interest (of $2000) eventually will. The question though is it appropriate to ask for it now given others have still not even got their principle back.

No. In fact, it is probably not worth asking for the interest AT ALL. And if you try to sue over this, you may find yourself running into trouble because you demanded such high interest.

Did you consult a lawyer at any point in this process? There's a reason banks do that, and have contracts. One of them is that a lawyer can advise you on what kinds of contracts are enforceable.

It's like... you can treat this is a transaction between friends, in which case bluntly, you got your money back and that's the end of it.

Or you can treat this as a business transaction involving four thousand dollars, in which case only an idiot would go in without making sure the contractual relationship was legally enforceable.

But you can't expect to get the best of both worlds- the kind of profits you make off your business partners, plus the kind of reliable, trustworthy behavior you see from your friends.

If I were ever to loan that kind of money to a friend, it'd be because I know on a gut-deep level that they have a sense of personal integrity you could break rocks against. And even then I'd be accepting, implicitly, the risk of never seeing that money again. I certainly wouldn't be kidding myself about making a pile of interest, because anyone I respect enough to personally loan money to is someone I don't WANT to take interest from.

Ah, that's the thing. I suppose I could be accused of being like a Ferengi, but generally I am going to say my real close friends would think more like me. Philosophically, with monetary compensation, its pretty up front what we get from each other. This only applies to large sums of money. For smaller sums for example, I would pay for one meal, and my friend would take turns the next time we meet. Occasionally we would treat each other to food without expectation of having the money returned, but $4000 is a wee bit more than that, and I think my friends would understand the principle of lending in economic terms - that is I forego using that money for something else, thus I should be compensated. If I ever needed $4000 from a friend and the bank would not lend it to me, I would offer to pay interest, although not 50%. Its just the concept of paying your debts which is like an integral part of me.

See, the problem is, if you're trying to keep track of accounts between friends like that, you do not have a friendship. You have a mutually enjoyable acquaintance.

Ask yourself the critical question: if this man never pays back the massive interest he offered you on your loan, how disappointed will you be? Will you cease to think of him as a friend? Will it poison your future interactions with him?

If not, then why the hell did you accept his offer of ludicrous interest in the first place?

If so, then why the hell didn't you take appropriate steps in advance to ensure you'd actually be able to collect the money?

When I talk about loaning large sums of money, I am thinking of a few very specific people, because they are the ONLY people to whom I would loan large sums of money. And thinking about them, I don't particularly desire profit from letting them use my money. I want my money back, because I may need it later, but I'm not going into that situation expecting to make interest. Not in the sense that I will treat this person as having somehow 'robbed' me of thousands of dollars in interest if they never get around to paying said interest.

I'd only loan the money to a real friend, and conversely I'm not about to let my desire to profit off a real friend have any impact on my relationship with them.

In which case, when I loan them the money I'm treating it as a write-off, one that it would be nice to see again, but one which I cannot realistically be sure of seeing again. Because I'm not about to take someone I trust, respect, or love to court purely for personal gain.

So maybe you'll get lucky and get all this money you were promised. But I wouldn't bet on it. And if you're actually worried about what happens if you don't get the money back... start taking serious inventory of just what you propose to do if he refuses to pay.

The thought did cross my mind, although the more likelihood is that it would take a while to do so. From a money perspective, there isn't a reason why he can't pay back given time, unless he engages in more risky investment. This was even before I found out how much after hours GP services offer, just based on the contracts showing how much doctors get paid annually.

Thing is, there is no reason NOT to assume he will engage in more risky investment.

Also, there is no reason to assume he seriously intends to pay you such exorbitant interest. I mean really? 50% in two months? He certainly didn't intend for that interest to ever, EVER compound, and no sane person would expect him to intend that. Even if he meant it at the time he said it, there are a lot of ways for a person to rationalize NOT paying interest on a debt, ESPECIALLY interest that is so disproportionate to what you could possibly have gained by keeping the money.

[mr friendly guy]

It's probably illegal to charge that much interest, so you have no recourse. Don't do it again, and move on. You'll never see the interest, nor should you.

Actually, not really. Some countries have short term lenders who offer "pay day loans" who charge obscene amount. Of course they do things like monthly fee, and establishment fee rather than calling it interest. In a few minutes of google in my country we have this.

http://www.sunshineloans.com.au/?gclid= ... Atbs8P8HAQ

A $2000 loan nets repayment of $2640 in a 9 week period. They don't call it interest, but essentially the lender gets 32% return in 9 weeks or 184% in one year. Since this is now 4.5 months, even if he paid back tomorrow I would only net 133% per annum. So what is currently agreed on (ie he doesn't have to pay back within 2 months) is well within what Australian businesses are allowed to charge.

On further googling, I have found some fun facts - even in your country its not quite illegal although it varies by state.

http://www.paydayloaninfo.org/state-information

For example - "Oregon permits a one-month minimum term payday loan at 36 percent interest plus a $10 per $100 borrowed initial loan fee." So for a $4000 loan thats an extra $1840 in one month, which is higher than what he offered me (at $1000 a month and repaid in 2 months). So nope, not illegal, though I am not sure why you feel I shouldn't have interest. I thought it capitalism the rule is "the higher the risk, the higher the return." Like all things, I made a calculated judgment based on what I estimated he would be earning.

Did you consult a lawyer at any point in this process?

My sister. However I am not so worried that I would eventually get it back (even if it takes a while) given what he has now told me.

See, the problem is, if you're trying to keep track of accounts between friends like that, you do not have a friendship. You have a mutually enjoyable acquaintance.

Are you referring to the friend who we take turns to pay for lunch? Or are you referring to the colleague who I lent money to. The former is my best friend and the latter is just an acquaintance.

Ask yourself the critical question: if this man never pays back the massive interest he offered you on your loan, how disappointed will you be? Will you cease to think of him as a friend? Will it poison your future interactions with him?

1. Disappointed. Although to be honest, it would most probably be in myself.
2. He was a colleague, so not a friend in the first place.
3. Not a working relationship, no. Although I will definitely not consider any financial interactions in future.

If not, then why the hell did you accept his offer of ludicrous interest in the first place?

Er, money. Seriously, did you have to ask that? Its the principle of "higher the risk, higher the return."

If so, then why the hell didn't you take appropriate steps in advance to ensure you'd actually be able to collect the money?

As I said, the higher the risk the higher the return. So I did factor in that possibility I won't get things back, hence why I opted to give him further time to get back on his feet. Basically the same principle why some companies file for bankruptcy to protect them from creditors NOW, and then refinance and pay them back later.

When I talk about loaning large sums of money, I am thinking of a few very specific people, because they are the ONLY people to whom I would loan large sums of money. And thinking about them, I don't particularly desire profit from letting them use my money. I want my money back, because I may need it later, but I'm not going into that situation expecting to make interest. Not in the sense that I will treat this person as having somehow 'robbed' me of thousands of dollars in interest if they never get around to paying said interest.

I'd only loan the money to a real friend, and conversely I'm not about to let my desire to profit off a real friend have any impact on my relationship with them.

Well Australian financial guru Paul Clitheroe doesn't see anything wrong with lending money to a friend. Maybe its a cultural difference between Australia and America, or maybe just between our social groups.

Thing is, there is no reason NOT to assume he will engage in more risky investment.

True.

Also, there is no reason to assume he seriously intends to pay you such exorbitant interest. I mean really? 50% in two months?

See my reply to FireNexus. The rate is actually quite comparable to some which is even allowed in your country Simon.

He certainly didn't intend for that interest to ever, EVER compound, and no sane person would expect him to intend that.

I am not asking for compounding, just the 50%. But I should note, Forex can be quite lucrative. If it worked his way, the 50% is most likely not unreasonable. If it didn't, he should be able to pay if off given time (assuming no compounding, just the 50%) based on his income (which apparently has increased since I lent him the money).

[Elheru Aran]

If I were you... I already got the original amount lent back. Anything extra is icing on the cake. Don't bother him, write it off, and if he does give you some money in the future? Well awesome, but that's about it. Don't stress about it and focus on the more interesting things in life.

[FireNexus]

Actually, not really. Some countries have short term lenders who offer "pay day loans" who charge obscene amount. Of course they do things like monthly fee, and establishment fee rather than calling it interest. In a few minutes of google in my country we have this.

I tend to assume other western countries are less shitty in that regard. I guess Aus isn't. In any case, I'd shit my pants if there weren't very specific licensing requirements to do that. Since you're unlikely to be licensed, the point is academic. And anyway, even if you have legal recourse, I'd consider it unethical to lend at such terms anyway. So I still think you deserve no interest.

[Enigma]

If I were you... I already got the original amount lent back. Anything extra is icing on the cake. Don't bother him, write it off, and if he does give you some money in the future? Well awesome, but that's about it. Don't stress about it and focus on the more interesting things in life.

^This. You got your money back. If you get your interest, great. If not? No skin off your nose. Unless you had everything written down on paper and signed by the two of you, don't bother. Just get on with your life.

[Ralin]

If I were you... I already got the original amount lent back. Anything extra is icing on the cake. Don't bother him, write it off, and if he does give you some money in the future? Well awesome, but that's about it. Don't stress about it and focus on the more interesting things in life.

There's literally no good reason not to sound him out about when and how he intends to repay the rest before doing that, other than politeness and not wanting to pressure the guy. Especially since he by all accounts genuinely does intend to pay back what he owes people.

And anyway, even if you have legal recourse, I'd consider it unethical to lend at such terms anyway. So I still think you deserve no interest.

Did you miss the part where the guy offered that interest of his own initiative?

[FireNexus]

Who cares? Desperate people will agree to all kinds of horrible shit. Taking them up on it is unethical.

[mr friendly guy]

Who cares? Desperate people will agree to all kinds of horrible shit. Taking them up on it is unethical.

The argument about desperation and hence they aren't in their right minds and making horrible decisions is a bit of a red herring isn't it? People take out pay day loans all the time for non desperate reasons, and I am willing to bet you'll still object to those interest rates despite that. So lets cut to the chase. You object to such high rates of return for a lender, why? Under what ethical system? Denying someone the right to make their own decision runs against the ethical principle of autonomy.

[Napoleon the Clown]

You got the original $4k back, why sweat making a profit off of it? If he pays you the interest, he pays you the interest. If he does not, he does not.

[General Zod]

Who cares? Desperate people will agree to all kinds of horrible shit. Taking them up on it is unethical.

The argument about desperation and hence they aren't in their right minds and making horrible decisions is a bit of a red herring isn't it? People take out pay day loans all the time for non desperate reasons, and I am willing to bet you'll still object to those interest rates despite that. So lets cut to the chase. You object to such high rates of return for a lender, why? Under what ethical system? Denying someone the right to make their own decision runs against the ethical principle of autonomy.

I don't see what the problem is then. Are you wanting validation on whether or not pushing for that much interest is a good thing?

[Simon_Jester]

Yeah.

I mean, what exactly are you asking for?

Most of us think it's not ethical to charge that kind of interest. He presumably offered it because he'd put himself in a stupid, dangerous financial situation, but that doesn't negate the ethical issue.

You can argue it's legal, but that's an issue between you and your attorney.

[Starglider]

I'm surprised that you got the principal back. FX 'investing' (excluding sophisticated flow strategies) is basically gambling and I would treat someone who got themselves into that position as a serious gambling addict, i.e. I'd be reluctant to loan them money even if they were family or a close friend, certainly not random acquaintances. Write off the interest and do not have any further financial dealings with this person.

[Simon_Jester]

Thank you for affirming my suspicions with your position of more detailed knowledge, Starglider.

[mr friendly guy]

I don't see what the problem is then. Are you wanting validation on whether or not pushing for that much interest is a good thing?

Not when I made the OP. I pretty much stated the reason earlier in my reply to you. Is it right to push for interest now when I got the principle back, when others who lent even more are still waiting for the principle, on the grounds that what is currently earning appears to allow him to pay it off easily. And no I wasn't seeking validation about the amount of interest per se, since I didn't see a problem with it.

Now I know some people object on ethical grounds to being paid the interest irregardless of whether the other lenders have been paid, so that's most probably a moot point to these people. However I am going to ask why, since it piqued my interest. So far I got that the rate is most probably illegal which was ridiculously easy to disprove with 5 minutes of google.

Yeah.

I mean, what exactly are you asking for?

See above if it wasn't clear. Although I kind of stated that in the second to last line of the OP. Now I can see if you object to paying the interest, you would find the fact that others are still awaiting the principle to be irrelevant to your consideration. However just pretend for a minute that the interest was at a rate which you consider reasonable, can you now see why there might be issue asking whether its reasonable to ask for it now when other lenders haven't been paid the principle?

Most of us think it's not ethical to charge that kind of interest. He presumably offered it because he'd put himself in a stupid, dangerous financial situation, but that doesn't negate the ethical issue.

Most being you and Firenexus. Crazedwraith and bilateral rope, Ralin don't object to it. Others are neutral on whether its unethical even though they may think its not worth the effort, and General Zod, well I have no idea what he exactly thinks except maybe we need to kneel before him. So I am not sure where you get most from, but lets take a step back. Why do you consider it unethical to charge that kind of interest? Don't just use some appeal to emotion, state your ethical principle or its axioms clearly. It might be "obvious" to you why, but its clearly not obvious to others even in your own country because its legal there. *

* no I am not arguing legality = morality, just that if its immoral its not obvious to a lot of people because its still legal.

[General Zod]

Since he hasn't paid back the principal to others it may not be fair to them to pursue the interest until they've gotten back what he owes them. At this point the interest is basically a bonus.

[Elheru Aran]

Since he hasn't paid back the principal to others it may not be fair to them to pursue the interest until they've gotten back what he owes them. At this point the interest is basically a bonus.

If I had to take a position other than simply 'write it off' this would be it, yeah.

I mean... nothing's wrong with you sending him a note saying something along the lines of 'thank you for paying the principal off, please let me know when you're able to pay the interest' but fact of the matter is that-- at least in *my* opinion-- charging interest on personal loans is unethical to start with, especially at such exorbitant rates, and it was entirely voluntary on his part. In my book, you made a bad call by extending the loan in such circumstances, you've been fortunate to get the principal back, and shouldn't expect the interest.