It is a dilemma as old as time, or at least as old as lending money and having family and friends in need of a “borrow” or loan, should I lend money to family?
And should I lend money to friends?
The answer many times comes in the form of an idiom or saying, “the best way to destroy a friendship is to lend money”.
And unfortunately, it can be true.
Money has many things, it is a powerful tool, and also a temptress and dangerous Mistress, and can also drive a wedge between family and friends. But yet, family and friends still ask to borrow money, to invest together in a business venture, and in some instances to just bail them out financially.
The Person Asking For a Loan
It is not easy going to someone who you are close to, family wise or good friends, and asking for money. It is a way of sharing something very personal to us, our personal finances, our money.
It may be the person asking for help is in debt, and cannot repay their accounts, or they just need a few quid to tide them over for the month; to pay bills.
Asking someone to invest in a business or company, such as starting up a company, is a bit different. There may be some excitement there in “pitching” the deal, telling them your ideas and plans.
Being in debt and needs financial help is always a tail between the legs affair. And you as the person being asked for money knows this, you sense and feel it. After all, this is your family or a close friend.
The heart strings get pulled on.
We All Want To Help Out
When being placed in the position of lending money to family and friends, for most it can be a bit awkward.
You may have some questions as to why they need to borrow the money?
- Is it to pay a debt or bill?
- Are they in arrears with an account?
- What are they going to use the money for?
- Will I get the money back?
- Can I even afford to lend someone money?
Over the years my advice to the question of lending money to family and/or friends has been not to do it. Period.
Rarely does any good come out of it.
Then if you make the decision you are going to lend the money, can you afford to do so? Can you afford to NOT get the money back?
OK, Your Going To Do It Anyway: Setting Out Terms
In some instances the heart rules the mind, or in this case, the heart rules the purse, and you are going to lend someone the money they need.
You want to help, you feel good they came to you, you have the funds to help, so you are going to do it and help!
However, can they afford to repay the loan?
Are they working, do they have an income?
I realise in asking these questions and discussing things, it bring about even more awkwardness, but it is your money being asked for.
Then my next piece of advice is to discuss the loan clearly with the person requesting the funds, and to set out terms. And yes, that means setting out terms in writing.
By doing this, it becomes more binding should things not work out, plus it lends (no pun intended), a bit more seriousness to the matter.
You set out a contract outlining the full terms of the loan:
- The amount of money borrowed.
- The monthly payments.
- The term of the loan, how long the loan is to be repaid.
- Any interest rate, if you are charging interest.
- A due date for payments.
- Have both parties sign the agreement, in front of a witness.
If you wanted to you could also include terms should the loan not be repaid, which I realise is a bit harsh doing this upfront. However, plan for all contingencies.
You also may wish to set-up a standing order as a form of repayment. This way you know the payments will be paid each month, as long as the standing order is in place.
Options Other Than Lending Money
In exploring options other than handing over cash to someone as a loan, you need to know the full reason as to why they are requesting the loan.
If the person requesting the loan has poor or bad credit, and cannot get a loan on their own, that says something right there. You lending them money may not be the best solution.
If the loan is for an emergency that has occurred, such as needing a new household appliance or some other necessity, that also says something.
You need to look at the reason for the loan, then you can look at options and alternatives to help.
What If My Friend or Family Member Does Not Repay The Loan?
This is where in the beginning you need to ask yourself, do I have the money to lend, and also will I be OK if I am not repaid?
If you lend money that you need or needed, you are putting yourself at financial risk. A bank would not do that….hopefully.
Never lend money you cannot afford to lose.
If your friend or family member does not pay you back, having the terms of the loan in writing, and signed by both parties in front of a witness, can offer options if you need to try and collect the loan.
If you are not repaid for the loan, you could just write it off, and chalk it up to experience. As to if it causes a breakdown in the relationship, that can be up to you and the borrower.
If you want to be repaid, if you have an agreement you do have options, such as taking the borrower to court, or even making them bankrupt.
However, keep in mind, as a creditor, which you are, your friend or family member could include the debt in a Debt Management Plan, an IVA, or even Bankruptcy themselves.
And if they have no income, and no assets, you may not be repaid.
So think long and hard before handing over money to family or friends. I am not stating not to do it, just enter into it with your eyes open.