In some circumstances, a friend or family member might need some money to cover emergency expenses, or simply cannot meet the requirements to secure a line of credit or personal loan. Unfortunately, while lending money to friends and family members is a sign of good will when, it can turn out problematic if your efforts result in disagreements.
A survey by Lending Tree in 2019 found that 29% of participants who lent money to close people later regretted it. Consider the following if a friend or family member approaches you for a loan.
Do lend money to people you trust
Before lending money with the anticipation of getting it back, you should be selective about the people you lend to. Restricting your lending to friends and family members you trust they will pay back can prevent future emotional and financial headaches. According to the survey above, nearly a third of lenders and borrowers had negative experiences, which include hurt feelings and resentment.
If you don’t trust someone and have doubts about their ability to pay back, don’t hesitate to decline their loan request. While this can result in some pushback, it is crucial that you only lend money if you are sure your relationship won’t go south. If you doubt the person, you can ask for collateral.
Don’t allow guilt to guide your decision making
The close relationship between the borrowers can influence your decision-making process. However, you shouldn’t allow guilt or other feelings to influence your decision to avoid regrets. For instance, you can’t be obligated to lend money to another person if your financial position is shaky. In such situations, you can find alternative ways to direct them to other agencies that provide financial relief to help the borrower.
Do get it in writing
Most people overlook the importance of having loan agreement between friends in writing. However, when loaning friends or family, documenting the transactions can help avoid future misunderstandings. Draft a loan contract between you and the borrower that highlights the responsibilities of each party. Documenting the transaction also gives you a basis for legal action if the borrower fails to pay back. Generally, the contract should feature:
- Names of both parties
- Date and amount of money granted
- Agreed minimum monthly payment
- Due payment date
- Interest rates, if you lend with some interest
- The consequences of defaulting
Don’t lend someone your credit
Some people may think cosigning a personal loan is better than directly lending money to a friend or family member. Since you won’t be handing over money from your pocket, you might not fill the pinch. However, cosigning personal loans affects your credit score. The payment history, loan balance, and inquiry will be highlighted in your credit report. If the borrower made purchases using your credit card, you will be directly liable for any accrued balances.
With more than 53% of American families lacking emergency funds, personal loans to friends and family members are common. However, even if you feel obligated to lend money to a close person, you should prioritize several considerations. Apart from evaluating your financial situation, you should consider the chances of getting your money back.