What to Consider When Lending Money to Family and Friends
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This situation comes up quite often where relatives and friends have different levels of financial success. A struggling person will often look to a close or financially stable family member or friend for help in a crisis. If this happens to you, what do you do?
Here are four important steps to consider if you are approached or thinking about lending money to a family member or friend.
Decide how important repayment of the loan is to you.
- If a family member or friend comes to you instead of a financial institution for a loan, the odds are the person does not have strong enough credit to seek a loan via traditional means. Like it or not, that means the person has some risk of not being able to repay the loan.
- Ask yourself how important it is for that person to repay you. Is the relationship more important? Or are you more concerned about repayment? If he or she slips from his or her scheduled repayment plan, you’re going to have to go down one road or another. You’re far better off deciding before it gets to that point so that emotions don’t get in the way.
If the relationship is more important, think of the loan as a gift.
- If you’ve concluded you’d rather have a relationship with this person than get all your money back, shift your thinking about the loan. Consider it a gift! Then you don’t have to worry about nagging the person for repayment or moving through legal channels – consider it a complete loss.
- If a person chooses to repay you, that’s up to him or her but there’s no need to do so. Again, it’s a gift.
If repayment is more important, then get the terms of the loan written down, signed and notarized.
- If you’ve decided that you’re going to insist on full repayment, draw up an agreement stating the terms of the loan.
- Why should you do this instead of just trusting a handshake? A handshake won’t stand up to legal efforts if you need to pursue repayment in that fashion – a promissory note will.
- Your best option is to go through this documentation process before ever handing over the money.
If a loan is unpaid, don’t let the issue sit around unresolved.
- The longer you allow the loan to sit there unpaid while you have negative feelings about the situation, the greater the damage you’re going to do to your relationship with that person and yourself.
- Spend some time thinking about whether you want to pursue payment legally or you want to just let the whole thing drop and write it off as a gift. The worst thing you can do is let the situation sit around and fester into something that could tear a family or friendship apart.
Many people believe money and friends or family don’t mix. Essentially, if you lend money to a friend or family member, don’t expect it back. That’s not saying you won’t—it’s just that if the loan does go un-repaid, you won’t be as disappointed.
Essentially, there are no such things as loans among family and friends—they’re gifts! They’re a gift if you give or receive one – and a gift if you get paid back!