While lending money to friends and family is generally considered a bad idea, sometimes you have to make a small loan to help those you love get by.
If you have the means, helping can be done if you’re smart about your personal lending practices. The last thing you’d want is to lose a friend or start a family feud over money.
To avoid any problems, employ the following 9 tips when lending money to friends and family.
Don’t Cosign Loans
Don’t put yourself in a bad situation by cosigning on a loan, getting them a credit card or letting them use your credit to get a cell phone or a gym membership.
Think about why they’re asking to use your credit. It’s probably because they have bad credit, which means they don’t pay their bills. See where I’m going with this?
The last thing you want is them in charge of your future credit score. If they miss a payment or default on the loan it could ruin your ability to secure credit or get a loan in the future.
Only Lend What You Can Easily Afford
Don’t loan anyone too much money. The more money that is exchanged, the higher the risk to the relationship breaking apart if the loan isn’t paid back.
Even if they claim they’ll pay you back in a week, just don’t do it. Anything can happen.
What if the money you lent them gets stolen? What if their expected tax refund comes in far less than they hoped? What if they get hurt? What if they lose their job?
Many things can happen that will ultimately lead to you not getting your money back.
Therefore, only lend what you can easily afford. Treat any personal loan like a gift. If they pay you back, then great, it’s a bonus.
If you go into the loan not expecting to get the money back, you won’t be in a bad situation if it’s not paid back or not paid back in a timely manner.
Consider How The Loan Will Impact Other Relationships
Sometimes lending money to one family member will impact your relationship with another. Did you turn down your brother for a loan last year, but this year you lent your other brother money? Does your spouse not agree (or do they even know) of your lending practices?
Think about how your funding could make others in the family feel before you lend the money.
Get The Details About The Loan
Always ask where the money is going before you decide whether or not to make the loan. Make sure it’s being spent on something worthwhile.
How would you feel if the other party used the money to have a nice vacation at your expense? What if it was to make an investment?
If the other party gets offended by your question, that’s a good sign that you shouldn’t be making the loan.
Charge Interest On The Loan
Most people that lend money to friends and family don’t think to charge interest because they think it’s rude.
But charging interest on your personal loan is the easiest way to protect yourself. Charging interest will help get your money back since it will make the transaction seem more businesslike than personal.
The odds of you being paid back increase as well because the other party will want to get the loan paid back as soon as possible so as to not accrue more interest.
Discuss The Terms
Talking about finances with friends and family is never easy, but if you’re in the position to lend money you really need to talk about all of the terms. This includes interest, repayment schedules and late fees.
It is imperative to discuss the details beforehand so there will be no misunderstandings later. You could be expecting to be paid back all the money a little bonus as a thank you. But if you didn’t talk about it, forget about it.
You could be expecting to be paid back within a month, but if it wasn’t discussed, you could instead see your money next year, if ever.
You could expect the other party will pay you something extra if they’re late on their payments, but if an exact amount isn’t discussed beforehand, expect nothing, nothing but an argument, that is.
Get Everything In Writing
Just because you’re on great terms with someone right now doesn’t mean you always will be. Get your loan terms in writing just so that in the event of a fallout, there’s no confusion as to who owes whom.
Having an agreement in writing also increases the chances you’ll be paid back. The other party will fear a lawsuit they will surely lose if they don’t pay you back.
Asking that the loan agreement be in writing is a bit like asking for a prenup. It’s awkward to ask, but it’s necessary to avoid possible problems in the future.
Imagine The Worst-Case Scenario Ahead Of Time
Talk about what happens in the event of a default and have a plan of action. Make sure the loanee knows that it’s a business transaction and that there are rules in place.
Distance Yourself From The Loan
Once the loan is made, resist the urge to micromanage how the money is spent. While you may feel an attachment to the money, once the transaction is done, the money is no longer yours and deciding how it is spent isn’t up to you anymore.