Nearly everyone finds themselves in either one position or the other at some point. The truth is that lending money to friends or family is a risky proposition at best. The mixture of money, emotion, and friendship (or love) can inject heavy doses of resentment into a personal relationship. Here we will look at both sides of the situation- the lender and the borrower.
If you are considering helping out a friend or relative financially, there are some guidelines worth knowing which can help you minimize the chances of anger, resentment, and other potential relationship-killing disasters. Remember that for most people, asking for a loan is definitely not fun. It can be embarrassing and intimidating.
The easiest way to begin the conversation is by laying out all the information honestly and completely. As someone who is contemplating loaning money to a friend or relative, you have every right to ask questions. Some good ones to start with are: How much money do you need? How much time do you need to repay the money? How will this affect our friendship (or family relationship)? You should have an honest conversation with the person to get a true grasp of the situation.
The following tips can help ease the entire lending process and ensure that your friendship or family relationship remains intact and healthy at the same time.
- Don't lend more than you can afford to lose. While most borrowers have every good intention of paying back a loan, defaults do happen. Never put yourself in a financial bind by lending money that you aren't prepared to lose.
- Decide whether the money you are lending is a gift or a loan. This is a detail which only you can decide. If the money is a loan, treat it as seriously as any other financial transaction.
- Make sure everything is in writing. This can be difficult, especially when you are dealing with a friend or relative. It brings up questions about relationships and trust and can be generally uncomfortable. But you need to protect yourself by having a loan contract in place.
- Put all the specific details in the loan contract. This includes: the amount of money you're loaning; a repayment schedule (monthly, one lump sum, etc); the dates of the repayment schedule; the consequences if the payment(s) isn't made on time; any collateral which is offered.
- Going forward, don't talk about the loan. If the repayment terms are being met, just let the loan get paid off. Try not to let money issues come between friendships and family relationships.
- Consider who is asking for the loan. If you know the person has poor money-management skills, you should probably think twice about lending the money. There's a difference between a genuine financial need and wanting something frivolous. Consider carefully.
With the economy still sluggish and credit remaining tight, more and more people have been forced to look for alternative means of borrowing. According to a 2019 survey conducted by the National Foundation for Credit Counseling, nearly one in four Americans have recently turned to friends and family members for financial help. Experts say that as much as $3 billion a year may be loaned each year among friends and relatives.
If you are in the position of asking a friend or relative for a loan, the following suggestions may help calm the situation. You might consider them the rules of etiquette for borrowing money from family and friends.
- Look at ways to cut your expenses. Go over your bills and see where you can cut costs. (It's hard to justify asking for a loan when you are paying $100+ a month for cable and frequently eating out). Look for a part-time job or apply for unemployment. Small savings add up so trim down your expenses. Borrowing should be your last resort.
- Explain what the money will be used for. If you offer an explanation upfront, this will alleviate a lot of doubt and uncertainty. Whether the person comes right out and says it or not, whoever is extending you the loan wants to be reassured that the money will be used wisely and not for something foolish.
- Be trustworthy and truthful. Whatever reason you give for needing a loan, make sure you stick to your word and use the money for what you said. If the friend or relative ever discovers you did something else with the money, you can pretty much kiss your friendship or family relationship goodbye.
- Write up a loan contract. A loan is a loan, is a loan, is a loan. Keep the entire process strictly business, which is what it is. Don't ask for any special deals or concessions. Understand that your friend or relative can drag you into court if you default on the loan agreement. Take your responsibility as a borrower seriously.
By the way, continuing with the Shakespeare quote: "Neither a borrower nor lender be, For loan oft loses both itself and a friend." Here he was warning against losing both the money and the friend. Definitely food for thought when considering loaning (or borrowing) among friends or relatives.