Lending money to friends and family is a gesture of goodwill when someone you know they are in a tight spot but if things escalate, it can be problematic or worse, you can end up in a financial crisis yourself.
Friendly loans themselves aren’t problematic but miscommunications and incidents aren’t uncommon. They happen. So it’s important to be mindful while lending money to family or friends. Here are some things you should keep in mind if someone close to you requests money:
- Trust
Almost everyone lends money with the expectation that the borrower will give it back at some point. Hence, it’s important to be selective about whom you offer financial help. Limiting loans to family and friends you truly trust to pay it back to avoid struggles later. It’s also important to keep in mind that if you don’t feel comfortable lending someone money for any reason, whether it’s because you don’t have that money yourself or don’t trust them to pay it back, you can say no. You aren’t obliged to say yes.
- Limiting the amount to what you can afford
There will be times when you want to lend someone money but you don’t have the amount yourself. In cases like this, you can think of the money as a gift. How much can you afford to spend without hurting your finances? It’s not literal, of course. They will pay you back. We all want to help out our loved ones, but it’s important to keep your own finances in mind before you agree to anything. You don’t want to end up in a worse financial situation yourself.
- Ask them for a written statement
A written statement may sound intense in theory but it’s not a legal contract or anything similar to that. Writing the terms out on paper can help avoid misunderstandings for all people involved. A written statement would include you and the borrower to outline the amount they owe you and a potential return date. This can help you if you ever need to take any legal action against them in case they refuse to pay it back.
Here’s a general structure of the details you can include in the statement:
- The amount they borrowed
- The date you lent them moneyInstallment payment plan, if applicableInterest rate, if applicable
- consequences if they don’t pay it off
- Saying no when uncomfortable
It can be uncomfortable and awkward to say no to someone who’s asking for financial help. Wanting to help doesn’t equal being able to help. If you don’t have the means, be honest about it. Or if you think the person isn’t reliable, you can and should politely decline. Keep your own finances in mind before you say anything.
- Don’t co-sign impulsively
Being a cosigner would mean if the other person fails to pay the repayments or ends up defaulting, you will be responsible for paying it off. Missed payments or defaulting can damage your credit score too. co-sign loans aren’t something that should be taken lightly. Research how they work and analyze your credit. Moreover, do you trust the person enough to commit to something this like? Cosigning loans is the last resort, so be mindful of it.
Conclusion
There’s a fine line between helping a loved one and jeopardizing your bond with them. You might have the money to help them out but lending money to anyone, especially a friend or family member, can hurt your own finances and put your relationship with the person at risk. If you are in such a position, consider your income, savings, and whether the person will be able to return the money or not. Take your time to review every angle before you say yes to anything.
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