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7 Key Rules to Follow When Lending Money to Friends and Family

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Linsay ThomasGuest Blogger
July 19, 2016 · 756 Views

Chances are, you have no problem spotting your friend a couple bucks for lunch or even $100 for that new outfit she’s been dying to have. But what if she needed $10,000 for a down payment on a car or $20,000 toward a house? Times are tough and loans are hard to come by, so if you’re doing well financially, don’t be surprised if a friend, sibling or someone else you’re close to comes looking to you for some cash.

So what do you do? You’ll likely feel conflicted because you want to help the person, but what if he or she doesn’t pay you back. You’ve worked too hard for you money to just give it away. You have bills, too.

Need help making the right decision? Read on for tips to guide you in the right decision and help you create a solid repayment plan should you choose to agree to the loan.

 

1. Don’t feel guilty.

Source: Crain's Wealth

We all have bills. If you can’t afford to spare any extra cash at this time, then don’t sweat it. You don’t have to come up with an elaborate excuse. At the same time, don’t feel like you are obligated to proceed with the loan. It’s a huge undertaking and if you feel some sort of hesitation already, you’ll likely feel resentment later, which can ruin your relationship. Make sure you truly want to help out this person and have the means to do so before agreeing to the loan.

>> SEE MORE: 9 Money Mistakes Everyone Makes But No One Admits

2. Get it in writing.

If you do proceed with the loan, don’t be under the impression that a verbal agreement is sufficient. Draft an agreement outlining the amount loaned, along with the payment terms and dates and amounts. You want to make sure to include a strict timeline for repayment – otherwise, a loan that should take five years to pay back may take decades. Also include your options for recourse should the loan default. A written loan agreement may seem very stuffy and business-like for a friend or family member, but it will lay out the ground rules and protect you should anything happen. Plus, memories fade over time and you’ll avoid arguments about what you said and what the borrower thought you said. You’ll eliminate any confusion. If you get the document notarized, you’ll be protected much more in court should the person refuse to pay up.

3. Don’t forget the interest.

Source: Entrepreneur

If you’re lending your friend $10,000, make sure he or she pays you back more than that. That’s money you could be using to pay off your credit cards or put in your retirement, so make sure you’re compensated fairly for your generosity. Here are some interest guidelines based on the term:

  • Less than three years: 0.25%
  • 3-9 years: 0.88%
  • More than 10 years: 2.21%

You might be required to pay taxes if you don’t charge interest, so don’t end up losing money on the deal. Another thing to consider: If you’re lending money toward a mortgage, check out National Family Mortgage for any tax benefits you might qualify for.

4. Only lend the amount of money you can afford to lose.

Things happen, and even though your bestie or sibling is typically very reliable, it’s possible he or she won’t be able to pay you back. He or she could lose their job or become involved in an accident that could leave them disabled and unable to work. If the borrower is left in a bind for some reason, you can bet that you’ll be the last one to get paid, since mortgages and credit cards will take priority. So while you might expect the best, prepare for the worst. Only lend the amount of money you would be OK with losing if the loan were to never be repaid. You don’t want to jeopardize your ability to pay your own bills in order to help out your loved one.

>> SEE MORE: 2 Easy and Effective Ways to Take Control of Your Personal Finances

5. Communicate.

Source: Lard Bucket

Communication is key in all relationships, and it’s especially important in this type of situation. Don’t just agree to the loan and forget about it until payment is due. Stay involved throughout the process. Make it clear that the borrower should communicate with you on any issues that can affect payment. Don’t be blindsided. Set up weekly meetings – via phone or in person – to stay on track. The borrower is a loved one – not just someone you know casually – so there’s a lot at risk if payments are missed and resentment builds up. You likely see this person on a regular basis – especially if he or she is a family member – so it’s worth it in the end to be proactive and invite discussion about issues and concerns.

6. Have no expectations outside of repayment.

Remember that you are just acting as the lender. You don’t have part ownership of anything the borrower spends the money on. Don’t expect to drive their new car or use their home. As long as you are paid back timely, you don’t have permission to micromanage how the funds are spent. Make sure not to overstep your boundaries or you could be the one creating the tension in the lender-borrower relationship.

7. Be proactive if payments are missed.

Source: Abacus Wealth

There may be times when unexpected bills come up and the borrower can’t pay you back on time. You should be understanding but firm. Don’t accept “I don’t have the money right now” as your final answer. Work with him or her to create a new repayment plan so that you can get your loan repayments back on track. If you act like the late payment is no big deal, the borrower will get the feeling that getting your money back isn’t that important to you. – and that’s the last thing you want that to happen if you wish to see your money again.

It’s a wonderful feeling to help loved ones achieve their goals, but loaning money always comes with a risk. By following the tips above, you can improve the chances of a successful loan agreement and possibly even strengthen your relationship along the way.


 

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Linsay Thomas is a seasoned writer and editor who has written thousands of articles about topics such as saving money, healthcare, law, pets and education. She hails from California, where she lives with her husband, two children and a menagerie of pets. When she's not writing, she enjoys sports, breeding chocolate Labs and visiting the beach.

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