There will be times when family and friends would ask you if you can lend money because they need it badly. You have to understand that most people consider this a bad idea for a number of reasons. It can even put a relationship in jeopardy when things go south. However, when someone you know is in serious financial trouble and you have the means to help, will you look the other way?
This is a dilemma most people have regardless if they have the money or not. One one hand, they want to help people close to them but money is the real problem. For those who have it, they know that it might not come back. For those who already have a tough time with their own finances, they do not know how to turn them down.
Money can break relationships and that is what you are trying to avoid when family or friends approach you asking for money. What you may not realize is that there is always some form of risk when borrowing money. When you take out a mortgage loan, you risk losing the house when you fall behind your payments. The same thing can happen when you take out a car loan and fail to pay.
When borrowing money from family members, you are putting the relationship at risk. When payment falls behind or when you do not get paid at all, the relationship turns sour and you might not talk to the person again. Family reunions get awkward and that is not something that can easily be fixed. When someone close to you is trying to borrow money, here are some of the things you need to look into to help you lend money the right way.
Can you help in other ways?
Once a relative or friend comes to you asking you for financial help, do not be quick to turn them down. It helps to talk to them why they need it and what they plan to do with the money. What this does is it helps you understand why they need your help and you get to understand the situation better. This provides you with insight on other things they might need apart from money.
If they are trying to put together college money, you can instead help by spending time looking for possible grants they can apply to. If they need the money to get something fixed at home, look for someone you know who can give them a big discount on the repair. You do not have to lend money right away because there are other resources you can share such as your time and even contacts.
Agree on details before you lend money
It is extremely important that once you decide to give them money, you have to get everything in writing. First off, you have to agree on the terms of repayment and if you will put interest on the loan. You need to sit down and agree on how much they will pay back every month, how long they will repay the money, and more importantly, when will they start paying back the money. However, you need to read the next item very carefully.
Lend only what you can lose
It might sound contradicting to what was said earlier but the reality is that a lot of these types of loans are not paid back at all. This is why it is important to lend only up to the amount you can afford to lose. Expect that you will not be paid back when lending money to family and friends. This helps you prepare financially as well as emotionally. CNBC even shares that when you lend to family, do not expect to see it again.
If you lend money not expecting to be paid back, you get to have an idea how much you can lend to people. You do not go out emptying your bank account believing that you will be paid back. Having this mentality also helps you let go of resentment because, in your mind, you gave money to that person. Looking at it from this point of view helps you let go of the transaction and still keep the relationship. Of course, you just need to smarten up and not lend again to the same person in the future.
Deal only with cash
This might be a given since they are asking you for money but there are times where they might come with a different idea. They might even say that you will not put out any cash and that they will only need your signature. They will ask you co-sign a loan for them to get an approval from a lender or even use your name to open a credit card.
You need to turn this down immediately because you should never put your finances in the mercy of other people. If they start missing payments or run away from their lenders, your credit score will be most affected. You will also be the target of collection calls because the loan is under your name. If you really have to help out financially, lend money.
What to expect
When you have to provide financial help to family and friends, there are a few things which you need to expect from that transaction. This will help you manage expectations better.
Consider the Impact
As soon as you lend money to people close to you, it changes the dynamics of your relationship. It can drive a wedge between the two of you which will be hard to recover from. This is especially true if you are constantly monitoring the loan asking when it will be paid and scrutinizing the way they spend money.
Expect slow repayment
If you are going to lend some money to family and friends, you should only do so with money you can part with. However, apart from some people who will really stick to the repayment plan, you need to expect very slow repayment from family and friends. Unlike how banks can slap you with ridiculous fees, penalties, and interest payments when you are late with your payment, you cannot do the same with people close to you.
Learn from experiences
Once you lend some money to family and friends, you need to remember how they repaid you, if they ever got to pay back the money. It is easier said than down but if they don’t pay you back, you just need to forgive and move on. When you see them, forget about the money and interact with them the same way as before.
However, you need to make sure you do not lend again to the same person. Learn from what happened and stay away from financial transactions with them. If possible, help through other means such as pieces of advice, time, or even your talent. This way, you do not expose your finances and put your personal relationship in peril.
It is hard to lend money to people especially to family and friends because it will always put your personal relationship in peril. You just need to approach the situation very carefully and make sure that both of you understand the risk involved in lending any amount to family and friends.