Lending money to a friend or family member can be a tricky situation. You love each other, right? You would do anything for each other!
Well…would you? If a family member or friend asks about borrowing money, what should you do?
We all may have friends in need of some cash from time to time. Maybe they’re going through a tough financial situation, lost a job, or suddenly had unexpected medical expenses.
Whatever the reason, it’s not uncommon for friends to turn to friends for a loan. But before you become the generous benefactor, here are some things to consider if you plan to lend money to a friend.
#1 You Don’t Have to Answer Right Away
U.S. News & World Report says, “tell your friend or relative you’ll think about lending them money. If this is a significant loan, you owe it to yourself to determine if you can afford to lend your hard-earned cash.”
“Poor planning on your part does not necessitate an emergency on mine,” said Bob Carter.
You do not need to rush to respond to any request. In fact, if you wait a bit, you can observe your friend or family member’s behavior. Are they constantly calling you asking for a response? Do they get angry when you can’t say yes right away?
These may be signs of behavior to come when you need the money back.
#2 Look At Your Financial Situation
Ask yourself if you can afford to make a personal loan. It’s tempting to want to help someone you care about, but not if it’s going to hurt you financially.
If you’re living paycheck to paycheck or have your own debt to pay off, lending money might not be the best decision. Don’t put yourself in a tough spot just to help someone else out.
Look at your financial goals and see if you can really afford to do this.
Remember that you’re allowed to say no, and it’s okay not to feel guilty about it.
#3 What Is Your Relationship?
Think about the kind of relationship you have with your friend or family member. Do you trust them? Are they responsible with their money? Have they paid you back in the past?
You don’t want to strain or ruin a friendship over money. If they’re trustworthy and reliable, then lending them money might be worth the risk.
#4 Talk To Them as a Friend
Have they looked into other personal loans or options? Are there other lenders they should approach? Before you loan money, talk to your friend or family member about the situation.
If your friend needs a significantly larger sum of money than you can comfortably part with, suggest other options, like a bank loan or setting up a GoFundMe page.
Support in Other Ways
There’s nothing wrong with supporting a great cause, but it doesn’t have to come at the expense of your own finances.
If you cannot be there for your family member or friend financially, there are other ways you can emotionally support them through a tough time.
Listening and offering advice can be just as helpful as a monetary loan sometimes.
#5 Establish Clear Terms and a Loan Agreement
Establish clear loan terms and expectations that both the borrower and the lender understand. All parties involved should understand how much money you are lending as well as when they need to pay you back.
What is the loan amount? How much interest will they pay? What is the repayment period? The loan includes interest or not?
Put It in Writing
Put it all in a written agreement and have both parties sign it. This may seem awkward to have a legal contract with a friend.
You want to know what is more awkward? When your friend or family member remembers the loan as a gift and you have nothing in writing about the repayment terms and the negative consequences snowball.
It is important to protect yourself and the friendship and do your best to avoid hurt feelings by using a loan contract.
A legal contract ensures that there’s no misunderstanding about the details of the loan. Plus, it’ll make your friend take the loan more seriously.
#6 Don’t Lend More Than You Are Comfortable With
It’s important to only lend what you’re comfortable with. Don’t feel pressured to lend more than you can afford or are willing to lose.
Remember that this is your hard-earned money and it’s okay to be cautious with it. If your friend or family member needs more than what you can comfortably lend, suggest alternative options like a personal loan from a bank or other alternative.
It’s one thing to help out a friend in need, but you don’t want to become a permanent financial crutch.
#7 Be Prepared To Not Get Paid Back
Be prepared for the worst-case scenario. What if your friend doesn’t pay you back? Can you afford to lose that money? If the answer is no, you may want to re-evaluate whether or not you should lend your friend anything in the first place.
Do not lend more money than you can afford to lose.
Be ready to have an honest conversation with your friend about repayment.
Lending money to a friend can be a tricky and awkward situation, but with careful consideration and communication, it can also be a way to show your support and love for someone in need.
At the end of the day, it all boils down to whether or not you can afford it, if you trust your friend, and if you set clear terms and expectations.
Whatever you decide, remember that friendship is invaluable, and sometimes that’s enough. With these tips in mind, you’ll be able to make the best decision for both your finances and your friendship.
‘No’ is a Complete Sentence
Remember, “No,” is a complete sentence.
You are not required to explain why you do not want to make a loan.
If your friendship is strong, it should be able to survive a yes or no answer.