Do you think a family loan is a good idea? This is more common than you thought. According to a survey, 1 out of 3 of their respondents admitted to borrowing money from family and friends in the past 12 months. Apparently, the average loan amount is $3,239. When compared to other types of debt, this is a huge amount.
When it comes to borrowing from family and friends, people are actually torn about it. Some people feel like it is their responsibility to help out a relative or friend if they can afford it. However, some people know that it goes beyond the financial capability to help. There is more at stake than the simple loan. If things do not go as planned, this might be one of the financial decisions you will regret in the future.
What to do when a family or friend ask for a loan
There is more at stake when you lend money to family and friends. One of the biggest is your relationship with them. If they fail to pay you back, it will cause a strain on the relationship. You may be able to forgive them over time but your relationship will never be the same. It will be forever tainted by the fact that they ruined your trust by not paying you back.
You might be thinking – they will never do that to you, right? Well, statistics say otherwise. According to a survey done about family loans, those who lend money to relatives only get 57% of the borrowed amount back. You have to consider this before you go ahead and lend your money. We all know that if they fail to pay you back, you will be losing so much more than the money that was borrowed.
This should be enough to make you take a step back when someone close to you asks for financial help. But since we cannot really control what happens to the people around us, you just have to be aware of your options. When someone comes to you for a family loan, here are some suggestions of what you can do.
Just say “NO”
It may sound rude but if you are really close to that person, you should be able to say “no” and be understood. They should not take offense and respect that it is your money and you can decide what to do with it. Of course, you need to explain why you cannot just lend them the money. You can say that your budget is tight or you are saving up for something important. If you are not sure about how to answer, you can simply say that you will check your budget first and get back to them. Then you can come up with an excuse that they can understand and accept.
You might want to be ready with an answer in case someone asks you again. If this relative or friend is persistent, then you need to inform them that it is not your job to bail them out and that they should respect your decision to refrain from lending them money.
Offer help in a different way
Although you said that you cannot help, that does not mean you are not willing to do anything. There are other ways for you to help out a relative or a friend. First of all, you can give them financial aid as a gift. Do not consider it as a loan because that will set you up for expectations that might put a strain on your relationship. But if you give a monetary gift, even if it is a small one, that would not make you seem heartless even if you refused to let them borrow from you.
There are other ways for you to help that does not involve giving money. You can opt to teach them how to manage their money well. Or you can help them identify the options that they have to get out of their financial predicament. There might be a way to solve it without borrowing money. This might be more rewarding than giving in to the loan.
Be smart when you lend them money
In case you are really compelled to lend them money, that is your decision to make. Just make sure that you will be smart about it. First of all, you need to get it in writing. Do not leave everything with just a verbal agreement. Your relative or friend should inform you of their concrete steps to pay back the loan. It is very easy to write a promissory note and have it notarized. This will indicate that you are serious about helping but also with getting paid. The written document should also include details like what would happen to the debt if something happens to you or the borrower. If they have something that you can hold on to as collateral, you can demand that too. Maybe the title of their house or some jewelry. This will give them the motivation to pay back the family loan.
What to discuss before lending money to a relative or friend
The truth is, there are many reasons why relationships are strained because the money came into the picture. However, there are instances when agreeing to lend money is the right thing to do. There are reasons that will make risking the relationship worth it. For instance, if the loan will help your relative or friend start a business so they will no longer have to struggle with money, then helping out will not be so bad. And if the loan is for something that will save a life, then you cannot stand back and not help.
But while the reason obliges you to lend the money, that does not mean you should do it recklessly. Before you fully agree to the family loan, there are a couple of things that you need to clarify.
Reason for the loan
Believe or not, some relatives or friends ask for a family loan and feel like they do not have to explain themselves. This is the wrong mindset. Since it is your money that they are borrowing, you have every right to ask how they will spend it. Do not go through with the loan unless they give you a reason. You want to make sure that the money will be used for something that is worth risking your relationship for. After all, that is the most valuable thing that will be at stake with this financial arrangement.
Another detail that you need to look into is the repayment plan. This is very important because you want to make sure that the money being borrowed will be paid back. Do not just accept “I’ll pay you back someday”. You need to have a concrete plan. How much will you be paid on a monthly basis? Will you be charging interest on the loan? There are so many things for you to discuss to force the borrower to stay true to their commitment.
Consequence failure to pay
Finally, you should discuss what will happen if the borrower failed to pay you back. There has to be a consequence. Most people do not know this but you can actually report a family loan to credit bureaus. If they fail to pay you back, then it will be reflected on their credit report. Another way to approach this is a collateral. It can be jewelry or something else they own that is of value. You can hold this until they have paid you back.
Once all of these details are revealed, you can go through with the family loan. Be very careful and make sure both of you will stick to the bargain. Treat your relationship as the most important aspect that is on the line here. Money can be earned but a great relationship takes years (even forever) to rebuild.