It’s great to have friends and family. They can really enhance your enjoyment of life. The closer you all are the better, but when it comes to some things, like lending money for example, that very closeness can be a problem.
It is said that you should separate business from pleasure, and, unless you are the sort of person who is happy to give money away, this is also very true when it comes to lending money to family and friends. Further reading on this subject can be found here courtesy of Wonga.
A gift or a loan?
The term “lending” something implies that that something will be returned. But when it comes to money, if it cannot be returned, you need to realise it is no longer a loan. It is a gift. Not many people are rich enough to be able to afford to give their hard earned money away, so when the person you are lending the money to is a close friend or family member, you need to think hard.
In the business finance world, the conditions of any financial loan are clearly laid out before the loan is given. There is usually a pre-agreed rate of interest for the loan, a pre-agreed repayment schedule, and also a pre-agreed penalty for late or non-payment.
It’s easy to apply these terms and conditions when the loan is a business one; but when you are lending money to friends and family, these things can prove somewhat awkward.
The worst case scenario
The first thing you need to acquaint yourself with when lending to friends and family, is that you might not get the money back. If you cannot accept this then don’t lend anything in the first place.
If you can accept this, then at least you have covered the worst case scenario. But it doesn’t mean that you shouldn’t make it plain, in as nice a way as possible, that you would like things to be as formal as possible, and that you do hope to be repaid.
Putting it in writing
What you should do first is to draw up an agreement, even if it is informal and just between the two of you. Putting it in writing and both signing it, is a way of making it clear from the outset how much the loan is for, and that it is a debt that you hope to recover.
You can actually get DIY loan agreements if you want to go down the “putting it in writing” route.
Only you can decide whether or not you will charge the borrower interest. If you are taking the money out of a savings account, you are obviously going to be forgoing that money earning any interest. You might decide to ask the borrower to at least cover that “expense.” Some borrowers may offer to pay interest without you asking.
The most important thing is to agree some sort of time limit on the loan being repaid. This doesn’t necessarily have to be a hard and fast rule, but it you do agree something (and preferably put in writing) it’s a way of focussing the borrower’s attention on a time scale.
Don’t be taken for a mug
Lending money to friends and family is a very caring thing to do. But you need to be clearly aware from the outset, that that same caring feeling, may work against you later on. If the borrower is still struggling, the last thing you will want to do is to put pressure on. It means that you will just extend the repayment period.
If you do this though, you ought to mention it to the borrower. If you don’t, the person you have leant the money to make take advantage of your kind nature, and this could go on ad-infinitum.
Lending money to friends and family is something you should avoid is possible, unless you intend it to be a gift. The pressure that a money debt can bring to bear on both parties can become a severe burden and has in the past ruined many good friendships and relations. So think carefully before you make a decision.