The web-site www.Investorwords.com defines a loan as follows: An arrangement in which a lender gives money or property to a borrower, and the borrower agrees to return the property or repay the money, usually along with interest, at some point(s) in the future. Usually, there is a predetermined time for repaying a loan, and generally the lender has to bear the risk that the borrower may not repay a loan.

Related<$> terms for loans are numerous: asset conversion loan, balloon loan, bank term loan, bridge loan, broker loan, callable loan, consolidation loan, day loan, demand loan, discount loan, evergreen loan, floor loan, indexed loan, interest-only loan, non-conforming loan, partially amortised loan, participation loan, piggyback loan, policy loan, purpose loan, recourse loan, securities loan, single-payment loan, unsecured and secured loans, wraparound loan, instalment loan, predatory lending. A loan is a contract. It can be orally delivered (as on a handshake) or written in stone. Generally, once formalised on paper by listing terms, conditions, remedies against default, collateral damage and so on, the contract becomes the purview of the law and attorneys.

And so it should, since the rights of both parties entering into any contract need to be considered and protected. Legal contracts enable this process, given that memories of terms and conditions become shorter and shorter, the longer that the contract lasts.

Where many years ago each and every loan might have been painstakingly constructed by hand and individualised for the parties involved, millions of loans today (like other contracts, such as leases) are standardised and generated on demand. “Sign here”, says the loan officer.

Informal loans between people, particularly relatives (otherwise known as rels in our family) may not contain any binding clauses to keep the agreement from slowly falling apart. Money issues are always difficult to discuss, making communication and misunderstandings into classic default cases.

These types of arrangements generally end up causing all sorts of family nastiness, disenchantment and adolescent behaviour ranging from freezing out various family members, to good old fashioned shoot’em-ups in some parts of the world.

In financial planning practice, insistence on arms-lengths transactions between close relatives is a required action for loan implementation.

Loans are not always what we think, in a conventional sense, such as a car loan, a bike loan, a mortgage, etc. When one pays up front for a service or product, you are temporarily loaning your money until the service or product is delivered.

An example is the process to build a house where a significant down payment is expected. You are loaning that contractor money, in return for his/her good faith promise to build the home of your dreams, on time, on budget, and on point — that is all corners are square and the tank doesn’t leak. If he/she doesn’t make that happen, without a contract of terms and conditions in writing, your recourse may be limited.

Pension and old age contributory monies, life insurance fees withheld from an employees wages are never loans to a business, even temporarily. If an employer ‘borrows’ these moneys, this a big problem.

Not only must the employee be reimbursed with interest, but a crime has been committed. In the US, stealing above certain monetary thresholds is considered a felony.

Credit cards are debt, and formalised loans. Credit cards are not free cash. Read the contract. In return for the use of the credit card issuers’ money (credit) you are promising to pay the balance in full.

Credit card abuse is on the rise, often from individuals who know better, and by those who want to scam the lot. The issuer, whether a bank or a credit card company is not going to absorb defaults from slow or no payer card holders.

Instead, they will penalise by charging higher interest rates, sometimes across the board. Wouldn’t it be nice if those with impeccable credit had their credit card rates reduced arbitrarily?

IOU’s stuffed into a cash register (or an office friend’s desk draw) are loans... Never let them mount up. Trying to pay back these back appropriately can be a cumbersome task.

Overdrawing your account — whether you want to admit it or not is a loan. When you open the account, be sure to check out the fine print. If and often it is a big if, it is your fault, the bank has the right to charge penalties and interest.

You know all too well that the burden of proof is on you to justify why the bank may be wrong.

Families and friends tend to be notorious for not communicating. Can you imagine what happens when two friends go into business together, one loaning the money and the other charged with making the business profitable?

Suppose the loaner gets restless when he sees the manager having a swell time every night down at the local jive bar, not only spending all the profits but the loaned capital as well. Not a good scenario, but it happens — that’s what contracts are intended to prevent.

Written formal documents prepared and executed by a good ethical attorney are worth their weight in gold. Appropriately composed contracts spell out the rights, resources of all concerned parties along with providing an arbitrator who understands and will remember ten years down the road the original terms and conditions, not what was thought to be happening.

Finally, regardless of the structure of the loan, and even though the intent of the loan initially is business-like, understood and needed, as the years go by and payments are made, emotionally, we may resent making loan payments.

And we tend to transfer that resentment on to the lender. Is it because what we wanted so badly to own, now has lost its lustre?

Whenever you enter into a contract to borrow money, particularly if it is for a very long time, remember to remind yourself every day of just how much you wanted that thing.

In other words, choose carefully. Those massive car payments five years from now become an incredibly heavy burden. And the only winner in your mind may be the lender.

The old folks believed in cash. If you want it, find a way to earn, then pay for it - IN FULL. Idealistic today, realistic back then. Save your loan paying skills for the one thing you need the most, your home.

Next mortgages — comparisons, contracts, and consumers.

Martha Harris Myron CPA CFP|0xae| is a dual citizen, Bermudian / US. At Argus Financial Limited, she specialises in investment advisory services and planning lifestyle transitions and rewarding retirements for executives and senior career professionals. DirectLine: 294 5709 Confidential email can be directed to>marthamyron[AT]northrock.bm

The article expresses the opinion of the author alone. Under no circumstances is the content of this article to be taken as specific individual investment advice, nor as a recommendation to buy/ sell any investment product. The Editor of the Royal Gazette has final right of approval over headlines, content, and length/brevity of article.