How to loan money to family and friends
There is perhaps no more explosive topic than the issue of whether or not to loan money to family or friends. In an attempt to avoid this potential minefield many people of means simply make it a policy to never loan money to their nearest and dearest. Other people assume that loaning money will be easier to family and friends sometimes with disastrous results. If you have been approached by a family member or friend about a loan you may be uncertain about whether or not it is a good idea. Before making a final decision read on for how to loan money to family and friends-
If the money is going to be a gift or has undefined repayment terms ("pay me back when you can")-
1. Hand the money over to the other person and walk away. If you are gifting the money to the recipient or have not defined repayment terms you must simply give them the money and then divorce yourself from the whole process. What the recipient spends the money on is now none of your business. Remember nothing creates conflict more in a family or friend relationship than the issue of money. You are only the source of the money not the decision-maker in this process. If you cannot abide by these non-involvement terms than you had better define the amount of money the recipient wants as a loan.
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If the amount of money that is being borrowed (loaned) than the following steps need to be taken-
1. Do not loan more money than you can afford to lose. If you are not in a position to make a large loan simply state up front that the loan will not be possible for you. Despite whatever perceptions your family member or friend may have of your finances you are the only one who truly knows what you can and cannot afford. While there may be some temporary hurt feelings turning down a loan request that will put you in financial straits is the right thing to do for everyone.
2. Ask what the loan if for. This is the point that you can ask what the loan will be used for. Do not be shy and think you are being intrusive. Remember a bank or other financial institution would want to know as well. Knowing the reason for the loan may make it more likely that you can help as most people are willing to help with school expenses, unemployment or medical crisis but they do not want to bankroll Junior's backpacking trip through Europe. If the borrower is unwilling to share the reason with you suggest they try the local bank.
3. Set up clear and defined repayment terms. You must discuss with the recipient what type of payment they can handle and how long it will take them to repay your loan. Many people find that putting repayment terms in writing and then having them notarized makes the arrangement more serious and is more likely to be taken seriously by the loan recipient.
4. For larger loans consider collateral. While this may seem heartless when dealing with a family member or friend, remember that the bank would want collateral as well. Parents have insisted that children sign over the title of their car or other valuable asset in order to insure repayment of the loan. Consider the maturity and financial situation of the loan recipient and decide whether or not you need to insist on collateral to help insure repayment of your loan.
5. Consider charging a small amount of interest. Most people approach family members or friends for a loan for two reason: They cannot get a conventional loan and/or they do not want to pay the current interest rate. While you do not need to compete with the going interest rates remember unless you have piles of money laying around the money you are loaning could be working for you. You may not want to try and make up all of your lost interest but even charging a small interest percentage can motivate the borrower toward quicker repayment.
6. Keep the loan private. Nothing can hurt a relationship more than to use the matter of a loan as fodder in a relationship. If you choose to make a loan to family or friends keep the matter between you in order to foster trust and privacy.
