Lending money to family or friends can be difficult. While you want to help out loved ones, you’re worried about what type of impact this loan would have on your relationship and whether you’ll ever see the money again.
While most financial advisors suggest only lending to family members or friends as a last resort, we understand that in some cases it may be the only viable option for those individuals to overcome financial difficulties. Here are some tips to ensure the transaction is one that benefits both parties.
Get all the details
If a friend or family member has asked you for money, ask them to explain specifically how they will use that money so that you can decide if it’s worthy of a loan. Don’t feel guilty about this. A bank would never hand over money without knowing exactly how it will be used.
Make it official
Always put the terms of your loan in writing. This clarifies that the money is not a gift and ensures that both parties are on the same page. The terms of a loan agreement should be signed by both parties and include the loan amount, purpose of loan, time period of the loan and payment amounts. For example:
On August 1, 2014, Bill Smith agreed to lend Anna Smith $2,500 to assist in the purchase of a car. In return, Anna Smith agreed to pay Bill $100 a month for 25 months for a total of $2,500. Anna will make the payments by the 5th of each month beginning Aug. 5, 2014.
Don’t lend money you can’t afford to live without
If you’re thinking about lending money, first evaluate your own financial situation to make sure you can even afford to do so. You want to be certain that you can still cover your own emergencies should they arise. Ask yourself – would I remain financially stable if this loan isn’t paid back?
Talk it over
Before agreeing to any loan, make sure you talk over the terms with your spouse or partner. After all, it’s their money, too. Similarly, if the borrower has a spouse or partner, they should understand the terms of the loan, too.
Don’t give into pressure
Don’t ever loan family or friends money if you’re being pressured to do so – especially if it will put you in a difficult financial position. Loans between friends and family should only be made if both parties are willing and able to abide by the terms. Stand firm and offer alternatives.
While lending to family members or friends is always tricky, sometimes your relationships trump any financial “rules” you may have heard. If you absolutely must lend to someone you love, make sure you do it with your head, and not your heart.