It can be really tricky to lend money to someone you are close to on a personal level like family and friends when you are asked for a loan because invariably either you will have to bid goodbye to the money or sacrifice your relationship, and unfortunately sometimes, both. While it can be a very good idea to stay away, it can sometimes prove impossible so you have to tackle the issue head-on. To avoid complications, it is imperative that you don’t lend on just good faith and instead enter into a contract specifying the terms and the repayment schedule just as you would have done when lending to a stranger.
How to React to a Request for a Loan When Asked by Family or Friends
When asked for a loan, by someone who is closely associated with you, it is very important not to react immediately with a yes or a no. Saying yes immediately binds you to give the loan while a no can offend and spoil a precious relationship. Make it a point to be interested in the reason why the loan is being sought and how critical the requirement is. It is one thing to be asked for a loan to meet a medical emergency and quite another to buy a fancy smartphone. Do ask what steps the person has taken to procure the money and whether loans from banks, credit unions, credit cards or even money lenders like https://www.libertylending.com/ have been considered. Insist on a full disclosure and never lend against vague or undetermined requirements.
Extend Only a Cash Loan
If you find yourself in a situation that you have to help someone out, make sure that you lend only cash and not get cajoled into opening a credit card for someone else or co-sign a loan. It is very important that you do not get into a situation where you end up being responsible for future actions of the borrower and affect your own ability to secure credit or impact your credit score. If the loan cannot be made with cash, you should politely opt out.
Restrict the Loan Amount to What You Can Afford
When lending to family or friends it is always important to keep in mind that the money may not ever be returned and it may be impossible to take strict follow-up action as the relationship may be jeopardized. In such a situation, stick to lending an amount that you can forego in case your loved one has a genuine reason for defaulting. Never overextend yourself when giving a loan because in case you don’t get the money back, it is you who will be in trouble.
Evaluate the Impact of Your Action
There could be serious repercussions on your relationships within the family if you were to refuse a loan to someone after you have entertained a request from somebody else or alternately, you give money to someone after having previously refused another family member. Differentiating between family members could be perceived as playing favorites and cause serious rifts in the family. It is a good idea to stop a while and consider the impact of your actions on the rest of the family. If a child requests a loan, it can be useful to discuss it openly with the rest of the family to prevent any confusion or hurt by the rest.
Find Out Why the Loan Is Required
Even though, when you ask why the loan is being sought may cause offense, it is essential that you know exactly to what use your money will be put to. If the reason is trivial and not essential or can easily be postponed, then it is better for you to politely refuse after explaining why. If you find the borrower is taking great offense, you should take that as a warning and find out more details. Also, it is important that you verify that the loan will be put to good use. For example, if a relative wants a loan for a down payment for a car, discuss his purchase with him and suggest alternatives if you find his original decision not up to the mark. The depth of the follow-up you do regarding the loan use obviously depends on the loan amount for it to be worth the effort.
Make Sure That You Charge a Fair Rate of Interest
Charging interest on a loan extended to a family member may shock the members of your family but it is a good idea simply because when you charge interest, it sends out a signal that you will not compromise regarding the repayment and also encourage the borrower to repay on time to escape the interest from mounting. Also, charging a fair rate of interest ensures that you are not liable to gift tax, which is applicable to all loans more than $13,000. Ensure that you execute a written contract with all the terms and conditions as well as the repayment schedule specified. If the loan is for a more substantial amount, consult your accountant regarding accounting, compliance, and default protection requirements.
Discuss and Settle the Loan Terms in Advance
Even though discussing money with family members is usually awkward, if you have decided to lend, make sure that the borrower is completely clear regarding all aspects of the loan. Make sure that he understands how much money is being given, what is the rate of interest, what the loan period is, the loan schedule, fees and penalties payable for late payment or default, and even dispute resolution in court. Having this discussion prevents confusion in the future and putting it down in writing in the contract prevents any miscommunication and gives you more security to produce in court if the need arises.
Conclusion
Lending to family and friends may not necessarily be the best financial decision that you take, however, circumstances may prevail over good sense because of the importance of maintaining good relations. Ensure though that the lending process is logical and the contract iron-clad so that you are not taken advantage of.
Meg is an author at Cinnamon Hollow. She writes on a variety of topics sharing tips and ideas for daily life.