Many of us have been in a situation where a good friend or family member is asking for money to borrow. For requests from loved ones, it is often difficult to say no. However, the world is full of stories of friendships and family breakdowns due to money, which can make lending to loved ones suspicious.
Although Good Finance trust one hundred percent, it is good to lending to set some basic rules in order to ensure peace of mind to both parties. Take a look at our guidelines and avoid the worst pitfalls of lending money to loved ones.
Only lend money if it really suits you
If the idea of borrowing money to a loved one raises doubts or conflicting feelings, it may mean that a loan request is better rejected. If you end up borrowing against your will, it often results in bitterness and remorse, which can easily spoil your loan seeker.
Denying a loan application does not make anyone a selfish or unfortunate person. Real friends understand and accept the refusal. At best, not borrowing can even save your entire friendship. It is worth reminding the borrower that there are always alternative forms of borrowing and funding.
Borrow only as much as you can afford to lose
Even if you are sure that your loved one will repay the loan, it is still worth borrowing only as much money as you are prepared to lose. Surprising things can happen, and when a financial disaster strikes, money borrowed from a friend is hardly on the top of your payment priority list.
Also, if the loan seeker has borrowed money from you before and has not yet paid off your previous debts, it makes no sense to lend more money to him. If a loved one has serious problems managing their finances, they can be advised to apply for debt settlement.
Make a repayment plan
Creating a payment plan may sound like a jubilee, but it’s worth it. One of the biggest mistakes you can make when borrowing money to friends or family is to assume that they have the same views on paying off your loan. First of all, can you be sure that they are going to repay the loan? For example, they may consider borrowed money as a gift and do not realize that you expect to receive the money back.
Not only does a concrete repayment plan increase your chances of getting the loan back, but it also helps to keep the gap well. For a clear repayment plan approved by each party brings both peace of mind and ensures that both know the rules of lending.
Make a written agreement
An oral loan agreement is not enough even for close ones, especially in the case of any larger loan amount. It is very likely that different people have different memories of what has long been agreed on a loan and its repayment. When lending money to a friend or family member, it is important that the loan is agreed in writing to avoid any dispute. It is best to write the loan agreement together so that it will please both parties. Remember also to sign the contract!
A written agreement also gives the loan a more formal feel and the applicant is likely to take the loan more seriously with the agreement.
The loan is not subject to approval
If you do not want to borrow money, refusal is perfectly permissible because everyone can do whatever they want with their own money. Of course, it is worth refusing to be friendly as possible. For example, you might say that you really want to help, but right now you have no extra money, or that you have unexpected expenses to pay yourself. Ask if you can help your loved ones in ways other than financially.