Loaning 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. However, lots of promises can be made regarding 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 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!
How to deal with loaning money to family
When it comes to loaning money to family, things can get a bit tricky. It's hard to navigate emotions when it comes to a family member in need of financial help. If you are considering loaning money to your family, you need to keep a few things in mind. A huge deciding factor is if this family member doesn't repay you, will that end the relationship? Money can be thicker than blood, and this can ruin relationships. In some cases, it may not be intentional that they don't repay you, but you need to ask yourself how you're going to handle the situation if this were to happen.
Sometimes it's best to consider it as a gift, then if you aren't repaid, there are no hard feelings. Not that it's your responsibility to go throwing your hard-earned money around, but if you are in a financial position that you can help, this can be an option.
How to deal with loaning money to friends
Loaning money to friends has many of the same principles and issues as loaning money to family. Again you will need to consider how this may affect your relationship. If they are unable to repay for any reason, are you willing to forgive and forget, or will a lasting friendship end? Would it be better to consider co-signing on a personal loan to keep from risking your savings? Co-signing comes with the responsibility of having to repay the loan if your friend is unable to. Remember, when it comes to loaning money to friends, you're not a bad friend if you are unable to. In some cases, it may be best to avoid loaning money to friends.
Rules to follow if loaning money to family or friends
That being said, here are some specific rules and to help you deal with loaning money to friends and family. This way you can minimize conflict and make the best decision for your finances!
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 asks you for a loan to pay for a plane ticket or a pair of shoes, 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.
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. Charge interest on a family loan
One option when it comes to loaning money to family is offering a family loan. A family loan is taking a business approach and doing your utmost to keep emotions at bay. Keep in mind anyone else lending out money charges interest. To keep this professional and teach a financial lesson, you could offer a low-interest loan. You could make the interest affordable and lower than a bank or pawn shop would charge, and this could be a good financial lesson for your family member.
However, depending on the loan's size, you need to be informed about the tax obligations associated with a family loan. The rate charged must be the minimum interest rate set by the IRS. This still may be a wise option when it comes to loaning money to friends and family. This can help them realize they need to be financially responsible.
3. Be clear on the repayment terms
When loaning money to family and friends, 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. When it comes to family loans, it's beneficial to put the repayment terms on paper. This can help prevent delayed repayment and help remind your family member or friend to pay you. You should pick a date, send them reminders, and follow up.
4. 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.
5. 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. 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 explain if you choose to, i.e., you have bills to pay, etc. 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.
6. Build it into your budget
If loaning money to family is something you are obligated to do often, build it into your budget. This applies to gifting money as well. This way, you plan for the loan or gift you are giving in relation to your other expenses and money goals. You want to be sure you don't sacrifice your financial wellness by overextending yourself.
There is nothing wrong with loaning money to family and friends and helping them 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. You want to be considerate of others but also be considerate of yourself as well.