Many of us have experienced being asked by a friend or family member to loan them some money. Irrespective of how big or small the amount, most adults will experience this at least twice in their life. If you are someone who has attained financial stability and been called upon by a friend or family member for some financial assistance it is okay to step up to the occasion provided you can afford it. If you do choose to proceed with lending the person the money it is vital that you set parameters. Since there is no recourse or formal arrangement to the transaction you run the risk of expectations not being met and relationships deteriorating. In order to protect yourself and the relationship it is important to follow the tips below to avoid confusion and misunderstanding.
- Only say yes if you mean it: If you find yourself questioning your own reluctance then muster up the courage to say no. If you are someone who feels obligated to say yes simply because of the nature of the relationship you need to think long and hard. If there is any element of doubt just say no, as not doing so may lead you to being resentful which will only attribute to crippling the relationship in the future.
- Ask what the money is being borrowed for: Since you’re loaning the person the money you have a right to know what it is being borrowed for. If the reason for borrowing is to further a business you should be aware what the business generates at the time the money is being advanced, in the case where a business is being set up you should have an idea of what it expects to earn and be mentally prepared that it may not work out as originally anticipated. In such a case you should set a frequency where the performance of the business is shared with you. Furthermore, there should also be discussions about a backup repayment plan should the business not work out. If the money being lent is to help the person buy a house or car you should know how they intend on paying you back – are they currently employed, do they have the capacity to pay you back? These are the questions you should be asking. Lastly, if the person is borrowing money to survive because they have lost their job or have experienced an economic setback you should only be ready to loan them what you can afford to lose. Since they might not be in a position to pay you back for some time, you should be prepared accordingly.
- Set a payment schedule: Always set a term to the repayment. You should specify the amounts, time limits, grace period or any other discussion points with the person borrowing the money. Whatever is decided learn to document it. The document can be put on paper or alternatively on an email. Whatever you do always hold a copy. Things get most complicated when they are unclear. Make sure your understanding is in clear black and white so there is no misunderstanding. Since discussions without documentation can easily be forgotten, it is important to document.
- Always involve a neutral person as an arbitrator to keep things unbiased should things take a turn for the worse.
- Never let the due dates slide: Once things are in black in white, always keep a follow up – do not be casual about due dates sliding. Keep it businesslike so neither of you feel like you are being taken advantage of. If there are telltale signs of more serious issues – like emails going ignored, calls not being answered then it would be a good idea to engage the arbitrator. If things get really serious make sure to consult an attorney.
Lending money to friends and family can be complicated but if practiced cautiously you may come out of it unscathed. If someone is borrowing money out of desperation, it is a lot better to gift them the money than loaning it. However, only do this if you can afford it.
These are some of my experiences when loaning money to my friends and family. I hope it helps you approach similar situations without the complications I experienced.