Finance Friday – Lending Money to Friends and Family

But what if, instead of being the one in need, you’re the one who’s asked to loan money to a friend or family member? Most people instinctively want to help. It’s only human nature. But loaning money to friends or family is an emotional issue that has ruined many relationships.

Here are some faithful tips to help prevent the situation from turning out badly for everyone involved…

Consider the Reason

Why does the borrower need the money and why are they asking you? Maybe it’s to help get rid of student loans. Or it could be to help plan for a new baby. Maybe they have a habit of self-destructive behavior and the loan will just enable more of it. Are they asking you because they can’t get a loan anywhere else? Or maybe they feel that you would be more lenient than other sources.

The reasons they are asking you for the money will make a big difference in deciding whether or not to loan it. You’d be less likely to hand over a check to someone who wasted their money and is now behind on their bills. Yet you’d probably be more likely to send money online to someone who experienced an unexpected expense or loss while on vacation, especially if they are overseas.

Consider the Amount

Treat the loan as a gamble and never lend more than you can afford to lose–and don’t ever withdraw from your retirement savings! You may never see the money again and it’s not worth risking your own financial well-being. If you’re loaning a large amount, consider asking for collateral. You can be listed as a lien holder if the money is for a vehicle or a second mortgage holder if it’s to buy a home. If you’re going to ask collateral, it’s a good idea to speak with an attorney before doing anything else.

Set Expectations

Is this going to be a loan that’s expected to be repaid, or will it be a gift? If it’s a loan that will be repaid, ensure that everyone involved is crystal clear on the details. Set a payment plan and discuss how you will handle any problems with repayment, including any possible legal action. Additionally, make sure that there are no questions by putting the terms of the agreement in writing. This not only clarifies each person’s responsibilities but it will also help you collect repayment if you have to take legal action.

Loaning money to friends and family can be a perilous situation with the potential to permanently destroy your relationship if it’s undertaken for the wrong reasons and not handled properly. But at the same time it can be an amicable and friendly situation if done for the right reasons and everyone involved understands and upholds their responsibilities.

This guest post was submitted by:  Samantha Peters, a contributor on the personal finance blog Paid Twice.  Sam enjoys writing about ways to ensure that your money is working hard and earning you the highest rates of return.  Sam lives in sunny San Diego, California where she enjoys life with her puppy Leona.