Lending to Family and Friends: Your 5-Step Guide

Do your close friend or family member tried to approach you to lend money? Is it hard for you to say “no”?

When someone asks to lend money, your first inclination is probably to help out. You can save yourself a lot of grief by knowing in advance how you will handle this kind of situations.

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“Neither a borrower nor a lender be, for loan oft loses both itself and friend.” These famous words came from Polonius, Shakespeare’s chief counselor to King Claudius in Hamlet. Polonius knew that a loan to a friend or family member often results in the loss of both money and the relationship.

Lend means to give money to someone who agrees to pay it back in the future. When it comes to helping out others, especially in desperate times, it is so hard to say “no”. But when it’s time for repayment, things can get very awkward. That is why some people say it’s best to avoid lend money to others. You want to do whatever you can. Otherwise, if you have enough money to help, just give it, don’t loan it.

Money between friends and family is a divisive issue and if anything goes wrong, it only gets worse. These are the following 5 crucial steps for lending people money to protect yourself and your relationship.

STEP 1. Lend money from your excess cash.

Excess cash means disposable income. Do not lend money from your savings or emergency funds because it won’t be wallowing in pain.

STEP 2. Only lend what you can afford to give.

When you grant a friend or family member a personal loan, there’s a wise rule of thumb that says only lend what you can afford to give. The reality is that many loans between friends and family turn into unintended gifts and ruined relationship. Communication breaks down, resentment builds and before you know it you have shut out each other.

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STEP 3. Set clear repayment terms.

Before any money is lent, set the repayment terms and determine how you want to be repaid. Repayment is implied when someone asks to lend money, so make it explicit. Talk about what happens if payments are late. If you plan on charging interest, that must be discussed as well.

STEP 4. Get it in writing.

There is no guarantee that it will be able to make payments going forward, so you need to lay out a contingency plan. You’ll need the person’s name, date you lent them the money, how much you lent them and a payment plan you’ve both agree upon. This will help you to avoid conflict in the future.

STEP 5. Don’t let money get in the way of your relationship.

This is the most difficult step to follow. If you lend money to a friend or family member, be aware that you may not get your money back and that your relationship may never go back to normal. This may cause tension, guilt, remorse and anger between you and the lender. Thus, the risk of damaging your relationship should be part of the initial discussion when lending money.

If you have follow those aforementioned steps, asking the right question and devising an agreement that works for both of you, the lender should know that you are serious about being repaid.

That sounds like a drastic step and maybe you choose not to take because  you value the relationship. But you will have to prepare for it by being professional and having made the lender aware of risks.

 

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