Americans owe $184 billion annually to friends and family from loans they take out and never repay.
Getting by with a little help from your friends is nothing new. And, honestly, it’s a tale as old as time: your friend or family member needs money and they’re out of options – so they come to you. Because, after all, 80% of Americans are currently in debt.
And what can you say, really? If you do lend it, you might ruin the relationship. If you don’t lend it, you’ll definitely ruin the relationship.
So how do you navigate the murky waters of lending money to people you know and love?
Read on for the do’s and don’ts of lending money to family and friends and learn how to navigate the situation easily.
Do Pretend the Loan Is a Gift
If you get yourself into this mindset from the outset then you can save yourself a lot of potential anger, disappointment, and resentment. The majority of loans are never repaid so it’s safe to say that there’s a very real chance you’ll never get your money back.
But if you pretend – at least to yourself – like you’re giving the money as a gift, then it’ll be a pleasant surprise if it’s paid back, but it won’t be the end of the world if it’s not.
Don’t Forget to Charge Interest
That’s right, we said it. When lending money to family and friends make sure that you charge them interest. You’re putting yourself out to help them, so make sure that you don’t discount that in the repayment agreements.
Plus, it’s good for whoever is borrowing from you to have some skin in the game when it comes to repaying at a reasonable rate. Charging interest can encourage them to repay on time and stick to the agreement – because if they don’t, they’ll end up owing more in the long run.
Do Draw Up an Official Agreement
This one is very important. You want to make sure that you’re aware of your negotiable instruments and that you’re drawing up an official agreement. In writing.
This will save you the heartache and trouble of arguing later about what you officially agreed to and what’s supposed to be happening. If you have an official agreement and you have it in writing then nobody – on either side – can change the terms of the agreement without written consent from all parties.
Don’t Lend Money to Family and Friends If It’s Going to Enable Them
Is your family member or friend asking for a loan because they were financially irresponsible? And, if so, if you say yes to this loan, are you enabling them to be able to keep being financially irresponsible?
If the answer to either one of those two questions is yes then you’re probably going to want to say no to the loan. It’s not good for you or your loved one (or your relationship) if you’re enabling them to continue self-destructive behavior.
Do Say No to Loans with No Due Date
You want to know when you’re going to be repaid. If you’re loaning the money with an open-ended repayment date then odds are you’ll never see that money again. Or at least you won’t see it when you need it.
By setting a loan with no due date you’re allowing your borrower to be able to treat the loan as a last priority. If they have no skin in the game then why bother trying to repay it soon?
If it’s unclear how the repayment process is going to work and when you’re going to be repaid then walk away from the situation.
Don’t Lose Sight of the Relationship
Remember that you love each other and that you’re family members or friends. Don’t lose sight of that because it can make things really nasty if you do.
Don’t think this gives you a lifetime’s pass into your borrower’s finances. And don’t make your entire relationship about the money.
Instead, talk about the money when you need to – but otherwise, let the relationship carry on much as it has.
Do See if There’s Another Way to Help
Before lending money to family or friends see if there’s another way you can help them with their situation.
Maybe you can help them find a loan at a bank. Maybe there’s a solution to their problem that doesn’t involve money. Maybe there’s something in their life they can sell to get the money they need.
Lending money to family or friends should really be your last option. So before you say yes see if there’s any other possible way that your family member or friend can get what they want or need.
Don’t Lend More Than You Can Afford to Lose
It is entirely possible that you’ll never get your money back. As such, make sure that you’re not lending more than you can live without.
You don’t want to put yourself in a situation where you’re unable to pay your bills, pay back your loans, or buy yourself the things you need.
Make sure when you’re lending money to family or friends that you’re checking your own finances first. Because nothing will destroy a relationship faster than if you end up in financial ruin trying to help out someone you love.
Lending Money to Family: Final Thoughts
So there you have it: the do’s and don’ts of lending money to family and friends. But make sure you remember that two-thirds of Americans lend money that is never repaid. So even though you now have all of this information in your pocket, still make sure you proceed with caution.
And if you’re curious about the history of lending money and how it started, how it evolved, and how we got to the place we’re at right now – check out this post.
