Many of us may have been in a situation where a family member or friend has asked to borrow money. In 2011, 7 percent of homebuyers borrowed from a relative or friend to help purchase a house, and 14 percent of business owners also borrowed from family and friends to help cover costs. Lending money can help someone in need and create goodwill. But lending money also can be cause for harm in a relationship or lifestyle.
Here are some tips on how to lend money and still keep the relationship on track:
1) Don’t lend money you can’t afford. If you are struggling with your finances, lending money to another person struggling with finances will not only hurt the relationship if it is not paid back but also will set you back financially, resulting in a double whammy. Make sure you prioritize your personal finances so the money will not adversely affect your living situation.
2) Consider it a gift. If you can afford to lend it, it is safe to assume that the money will not be paid back. If the person borrowing doesn’t pay it back, you will not be disappointed and it will not affect the relationship. If you are willing to take the risk, the gift can be seen as a nice gesture to help someone in need. Relationships are more important than money, so if you do end up getting paid back, it will be a nice surprise.
3) Create a contract and be clear on terms. If you don’t want to consider it a gift, get the loan in writing just like a business relationship. It is important to take emotions out of the process so you set up proper expectations, a payment schedule, an interest rate or potential collateral. If this isn’t stated up-front, it will be easy to be taken advantage of, especially if you compromise between a gift and loan. Consider even setting up an automatic debit from their credit card or bank account. Charging an interest rate and getting collateral is to compensate for the risk you are taking. If the person borrowing the money is not cooperative, then it may be a sign lending is not a wise idea. Animosity and tension can build quickly if it is not handled properly and expectations are not met. It is important to be clear and hold the borrower accountable.
4) Know when to say no. Consider why the person needs the money. If you feel the person is borrowing to fund their lifestyle as opposed to paying for emergencies, you are only supporting their habits. Saying no may force them to re-evaluate their own financial situation. In the long run you will be helping them out. If you have a tough time saying no, use a third party person, such as a financial adviser or accountant, to be the fall guy who stated the loan would not be in line with your financial goals.
Helping out people in need is good! But many times what was meant to help someone out turns out harming the relationship. They key is to look at the big picture on your personal finances, have clear expectations and be sure it’s something that will help the borrower, not hurt them in the long run.