MONEY TRAP – Cash Transactions And Oral Agreements.

There is a famous saying “Where large sums of money are concerned, it is advisable to trust nobody”. In today’s World, Trust….is a very precious commodity. The newspapers are full of stories, where people have lost all their possessions just by trusting the wrong person. You go to a store and buy a mobile phone, the first thing you ask, where is the receipt and the guarantee card? You pay your electricity and water bill and ask for the receipt. Will you buy a laptop without asking for the receipt, no matter how friendly the salesman or what he promises? You will first ask for a guarantee card. There is no question of any oral agreement. Everything is on paper. Everything is written. You know that if you buy a shirt or a pair of shoes, you must ask for the bill. Yet, when you lend money to your friend, you conveniently forget to take things in writing. You trust your friend. He has promised to pay you back…come what may. You don’t need any written agreement. Want to learn how to make a wise investment? Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice / education to ensure that you are not misguided while buying any kind of financial products.

You trust family and friends – Lending money to family and friends can be very messy. You must think a thousand times, before you lend money to a friend. Chances are you will lose both…Friend and the money. If you dare ask for your money back…you will have to choose between your friend and the money. Lending to family and friends must be avoided at all costs, unless you are prepared to lose your money. If you really want to see your money back, you better have a written agreement. An oral agreement is just too weak.

Let us understand from this example why an oral agreement is just not enough, while lending to family and friends. Abhijith and Lokesh were friends for a long time. Abhijith used to reside in Mumbai and Lokesh used to reside in Bengaluru. Whenever Abhijith visited Bengaluru, he made it a point to visit Lokesh’s home. Both Abhijith and Lokesh attended each other’s family functions. One day Lokesh was in urgent need of money. He had availed a personal loan of INR 5 Lakhs for a medical emergency and was struggling to repay the EMI’s. The loan recovery agents of the bank were harassing him. Lokesh was tired of the threatening phone calls. When Lokesh told Abhijith about his problem and asked for INR 3 Lakhs… Abhijith did not even hesitate even for a second. Abhijith told Lokesh “You are my best friend. Pay me back when you can”. There was no written agreement. Just a promise over a handshake. A year passed and Lokesh did not pay Abhijith a single rupee. Abhijith also noticed a change in Lokesh. Lokesh had started avoiding him. Lokesh never invited him for any of his family functions. Lokesh also never turned up when Abhijith invited him for his functions. One day fed up with Lokesh, Abhijith confronts him. Abhijith asks for his money back. Lokesh asks him…What money? I never took any money from you. Today, Lokesh and Abhijith don’t talk to each other and are bitter enemies.

What do you learn from Abhijith’s mistake? Abhijith lent Lokesh a large amount of money. Even though Abhijith wanted the money back, he lent a very large sum of money, without a proper written agreement. The whole deal was a very casual oral agreement. Abhijith should have insisted on a promissory note. It is an unconditional promise made by the borrower, to repay a fixed sum on demand or on a specified date. You can also draw the promissory note on a stamp paper and get it notarized. Use full names as mentioned in the PAN or passport and write the date and name of the place, very clearly. If Abhijith had insisted on a promissory note from Lokesh, then Lokesh would not have dared default on the borrowed amount.

Paying rent the casual way – If you stay in a rented house, paying your rent on the first day of each month, is something you just cannot avoid. The first rule when you pay rent…ask for the rental receipt immediately. Not tomorrow…Right now. What happens if you are casual when asking for your rental receipt?

Kunal stays in a paying guest accommodation in Bengaluru. He pays INR 5000 for a single room. Kunal pays the rent on the first day of each month. Kunal is great friends with the caretaker, Pavan, of the paying guest accommodation. One day while rushing to office, Kunal suddenly remembered that it was the first of the month. He rushed back to his room, grabbed INR 5,000 from the shelf and called Pavan. Kunal gave Pavan INR 5,000 and asked him to pay the money, to the manager of the paying guest accommodation. Pavan said “Don’t worry…I will give the money to the manager”. When Kunal checked with the manager the next day, he found that the manager had not received the payment. Worried Kunal asked Pavan if he had paid the manager the rent. Pavan asked him…What money? After accusations and counter accusations, Kunal had to pay the rent again.

What do you learn from Kunal’s mistake? Kunal should have asked for things in writing, when he gave Pavan the money. He should at least have asked Pawan to sign that he had received the money. Not having a written agreement and only depending on an oral agreement for a cash transaction was a very bad move, Kunal would soon regret. Kunal had to pay the rent twice. Trusting a friend or your caretaker is not bad. Only back it up with a sound written agreement.