Rules of Lending Money to Family And Friends

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Lending money to family or friends is a situation that almost everyone has experienced at one point or the other. Emotion and obligation are involved because you want to help out and lots of promises are made in regards to when and how the loan will be paid back.

The trouble is a good percentage of the time when you lend money to family or friends, the repayment is delayed or you just never get your money back. That sucks. So in this post, I'm going to give you some tips on how to deal with lending money to family and friends!

1. Determine if you can afford it

When it comes to lending money to your family and friends, it should not be at the expense of your own financial goals and bills especially if the money is not needed for an emergency situation.

If you have debt, or pressing bills to pay and someone is asking you for a loan to pay for a plane ticket or a pair of shoes then it doesn't make any sense for you to lend them the money. You cannot afford to pay your bills late or ignore your debt so someone else can go on holiday or buy new shoes.

Also regardless of what the loan is for, paying your bills and your debt and contributing to your financial goals should be the priority. If you have spare money to lend to a friend or family member it should be after all your financial obligations are met.

Sometimes, we can't help it if a friend or a family member has poor financial habits. However, you may need to step back to avoid getting yourself dragged into their poor financial habits too. Otherwise, their behavior can have a negative impact on your finances too.

2. Be clear on the repayment terms

When you lend money, the plan for repayment should not be "when they have it" or "in a couple" weeks. If the repayment plan is too vague the chances that you will get your money returned to you are slim. Pick a date, send them reminders and follow up.

3. Have the expectation that you may not get your money back

People who borrow money from family (or even friends) don't always take the loan as seriously as they should. This is because there usually is no contract and there is really not much you can do about it when it comes to getting your money back. You cannot garnish their wages and you can't put it on their credit report.

Also when people owe money, many will "forget" or become hard to reach all of a sudden. Yup, family and finances can get complicated.

So when you lend money, keep this rule in mind; "If you cannot afford to lose it, don't lend it". This will help you avoid a ton of headaches and stress. Don't use money designated for your upcoming bills or financial goals as a loan to anyone or you might be stuck when your bills are due.

P.S. You can, however, create a family loan agreement to make it official.

4. Learn to say no

If you don't have it, can't afford it or the loan purpose doesn't make sense to you then don't be afraid to say no. Unfortunately, money is one of the top reasons why relationships and friendships disintegrate and if your friend or family doesn't like your response or feels like you don't want to help them out it can become a problem.

You can offer an explanation if you choose to i.e. you have your own bills to pay, and if they cannot understand where you are coming from then maybe you need to step back and reassess your friendship or relationship as a whole.

5. Build it into your budget

If lending or giving money to a family member is something you are obligated to doing often then build it into your budget so you make sure you plan for the loan or the gift you are giving in relation to your other expenses and money goals.

In closing

There is nothing wrong with helping others out. In fact helping others out and being generous should be part of the way you live your life, however, it has to make sense for you and should not derail your financial goals.

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