Is Lending To Family and Friends Smart?

Money issues are often at the heart of many family squabbles because of the nature of transaction. Those who feel comfortable enough to ask for loans from loved ones may also feel less of a responsibility to pay back the money according to the loan terms. Often lenders make the mistake of not getting things in writing to make everything legal which leads to problems down the line when the borrower defaults.

While lending to family and friends is a complicated matter, especially because of the emotion involved, there are ways to make it work if it’s absolutely necessary. Here are some guidelines to follow whether you are the lender or borrower:

Make It All Business
No matter the relationship involved, any financial transaction that is expected to be repaid should be considered a business arrangement. Without terms in writing, it is likely money will never be repaid timely, if at all. Outline the terms of what is being borrowed and the timeline for repayment. Each person then gets a copy of the agreement. If the terms are not followed, be sure to clarify that further action, including legal means, will be taken to recoup the money.

Be Upfront About Reasoning for Loan
If someone is willing to help out, it is advisable the borrower is upfront about the need for a loan. Many people would be willing to do what they can in a crisis situation but would be more than offended to learn their hard earned money went for something frivolous. Never ask for a loan that isn’t absolutely necessary and don’t be surprise if the lender keeps tabs on your spending.

Prioritize Your Loan
While you need to take care of other bills, paying back a loan to a family member or friend should be on the top of the list. Follow or exceed the agreed upon payment arrangement. Keep the lender updated on any concerns you have about meeting the payment terms. Stay on track to pay off the loan in the time allotted and then refocus on your other debt responsibilities. Lenders should also remain solid on sticking with terms or they risk getting taken advantage of repeatedly.

Find Alternatives
When you are in debt and have no savings to speak of, it can seem like there is nothing else to help you besides your loved ones. However, it is better to exhaust all other resources before approaching those you know for financial help. In some cases, people may not even be willing to lend out money so you need to have back up solutions in mind