Whether they are big nationals like Bank of America (BAC), or local and small, U.S. banks are making it tougher than ever to get loans. According to an April survey on bank lending practices by the Federal Reserve, about 55% of U.S. banks said they’ve tightened lending requirements in the last three months, up nearly 30% since January. The majority of domestic banks also reported that they had tightened their lending criteria on prime, nontraditional, and subprime residential mortgages. Meanwhile, default rates on outstanding mortgage loans have reached 7.3%, a record high.
So, where should you go for dough when the banks say no? The majority of people looking for a loan seek out friends and family, say Jeanne Fleming and Leonard Schwarz, the authors of Isn’t It Their Turn To Pick Up The Check? “We live in a world where housing has become so expensive and an awful lot of people look to their parents for help with down payments on a first home,” says Schwarz. “I don’t think that was true a generation ago.”If you are considering making a loan to a friend or family member, or if you are the one requesting the loan, proceed with caution and get it in writing. According to Fleming and Schwarz, 95% of adult Americans have lent money to friends or family members, and close to 50% of these peer-to-peer loans aren’t repaid in full. “There are two virtues of putting loan of any magnitude or complexity in writing that have nothing to do with challenging the integrity of the borrower,” says Schwarz. “It gets rid of ambiguity and it fleshes out expectations.”
Write down the amount of the loan, when it will be repaid, and if interest will be paid. If your mother gives you money for a down payment and specifies a repayment date, you know it’s not a gift and there are no misaligned expectations. “People can feel bad about asking to put the terms of the loan in writing but I think it is always a good idea,” says Fleming. “And, it can save a friendship.”