Taking “Personal Loans” to a New Level: Should You Loan Money to Family or Friends?
Money is tight all over, and maybe you know someone in a financial pinch. Perhaps he or she has been turned down already for a loan or line of credit and –wisely- want to avoid the high interest fees of using a payday advance service. Your kind intentions may impel you to make a loan, but mixing business and personal relationships can be a very delicate practice. Done right, it can foster trust and goodwill, but more often such deals go astray and leave bitterness on both sides. Here’s how to handle the potentially sticky situation when a friend or relative asks you for money:
Red Light – Don’t Lend to Family and Friends if…
Before you fork over any cash, know the borrower’s financial habits. If the borrower has a history of irresponsible spending, loaning them money is enabling a bad habit that will cause resentment and worsen the situation for both parties. Only consider making a loan if you know that the person is responsible and is just temporarily down on his or her luck.
If you feel obliged to help out and can afford it, make a one-time financial gift and write it off. If you don’t feel confident making a loan, don’t cosign on one either. If the loan you cosigned goes into default, you are responsible for repayment, and no one wants to repay someone else’s debt. Many people feel that they can’t say no for fear of damaging the relationship. Saying “no” won’t damage the relationship, it’s how you handle the situation after “no” that matters. Explain that you don’t want to ruin a good relationship over money and its complications. Check in once in a while to see how he or she is doing, offering a sympathetic ear or any help you can give. Consider offering non-financial assistance; a home-cooked meal, transportation, help finding a new job or occasional childcare can be more valuable in some circumstances.
Green Light – You Should Lend to Family and Friends if…
If you do decide to make a loan, you can keep it on track with communication and upfront terms. First of all, take time to discuss the details of the finances; examine the budget, consider cutting some expenses and look for additional sources of income. These steps may mean a loan isn’t necessary after all, and either way it establishes good habits that will ensure repayment and financial security later on. Next, lay out terms clearly and specifically in writing to avoid confusion, miscommunication or disputes. Set up a repayment plan, including when repayment will start, length of repayment and whether or not interest will be added. You may find that using a free online template to write a formal legal document works best to ensure that all the details are covered.
Making a loan to a family or friend means not only the business risk that the borrower will default but also the personal risk if the relationship goes downhill with the unpaid loan. If you trust the borrower and feel that you can help, make the loan with clear, written terms. Otherwise, you must be able to say no to someone you love who is fiscally irresponsible. As difficult as it may be, it’s the best choice for them and for you. After all, when it comes to money, it’s nothing personal.
Care to share your thoughts about loaning money to family and friends?