A friend or family member asking for a loan can be an uncomfortable situation. On the one hand, saying no to a trusted loved one who has asked for help is difficult. On the other, saying yes could result in a number potential issues, including the very real possibility that your money will never be paid back. It can be difficult knowing how to proceed, and how best to handle any problems. Here are a few things to consider when loaning money to friends and family.
Set realistic expectations
When loaning money of any kind, there is always the possibility that you will never see that money returned. Before you make the decision to loan out your hard-earned income, be certain that you’ve accepted this. In an article for Investopedia, Brian O’Connell notes it is better to go into the loan with expectations lowered. This also applies to the rate at which you may be repaid. Since instituting interest or collateral is probably out of the question for a friend or family member, it could take a while for you to see your money. As long as you keep this in mind, you’re more likely to avoid disappointment, and damaged relationships.
Limit the loan amount
As previously mentioned, it’s always wise to go into friends-and-family loans with lowered expectations. It might be a long time before you’re paid back, if you’re paid back at all. With this in mind, it’s also important to make sure that you are only loaning out as much money as you can afford to potentially lose. Helping a loved one out of a difficult financial situation might feel like the right thing to do, but doing so in a way that puts you at financial risk creates new problems. Before agreeing to a certain amount, be certain that your savings, bills, and other monetary requirements won’t be at risk if your loan is never repaid.
Put it in writing
When dealing with any amount of money , it’s always important to make sure that there is a solid record of the numbers. As finance specialist Priyanka Prakash notes at Forbes, memories and priority can fade and change with time. Exact numbers, timelines and due dates may be forgotten or altered. Putting these things in writing helps to keep the original agreement intact and easily referenced in the future. This can also have the effect of making the entire arrangement seem more serious to the borrower. Asking for a loan from a loved one often carries a feeling of informality, often resulting in delayed payments and other details being loosely handled. Having the loan and its associated conditions in writing makes the agreement feel more official, and therefore more likely to be upheld.
While loaning money to friends and family can feel like a minefield of potential issues, it is more than possible to approach such an agreement in a way that benefits both you and your loved ones.