Tips for Lending Money to Family and Friends

Family and friends may turn to you for a loan to avoid costly financial institution loans and default penalties. However, treating such loans as business transactions safeguards your interests while keeping your relationships intact. While you may be inclined to help your loved ones, communicating your repayment expectations ensures that all parties are on the same page. This avoids the consequences of lending money to loved ones. Here are five tips for lending money to family and friends.

1.    Set clear repayment terms

When loaning money to friends and family, the agreement shouldn’t be to repay whenever they can, as this may compromise the chances of getting your money back. When deciding on the loan terms, agree on a favorable date, set reminders, and do follow-ups. Getting the repayment terms written down keeps your loved ones aware of their obligation towards you and prevents delayed payments.

When lending money to your family and friends, consider using a loan agreement template to formalize the loan, get reminders and generate a payback schedule. These templates contain the loan terms, including the amount, period, interest rate, and payback starting date. They also have provisions for early repayment, default, and governing laws.

2.    Charge interest

Since your family loan takes a business approach, you should charge interest as other lenders do. To keep the deal professional, consider offering a low-interest rate on loan. You can make the interest less than a financial institution would charge. Alternatively, you may set the IRS minimum interest rate on family loans to avoid tax complications. Nevertheless, you should beware of family loan tax obligations based on the loan size.

3.    Lend what you’re comfortable losing

Lending money to family and friends can be disappointing because some never repay. While you have the option to say no to them, you may choose to lend out an amount you’re comfortable losing. This means you shouldn’t have high repayment expectations when lending money to loved ones. Only give an amount that you’re ready to forgive emotionally and financially should your loved one default. Consider the loan a gift to avoid injuring the existing relationship.

4.    Prepare a checklist

When lending money to family and friends, it’s vital to prepare a checklist to help you decide whether they’re eligible for a loan or not. Before loaning out any money, consider if they’ve borrowed money from you before, if they paid back, how promptly they paid, the likelihood of them paying back this time around, and what the funds will be used for. Find out how they intend to repay the loan. If you get satisfactory responses, you can loan them the money.

5.    It’s okay to say no

Money is among the top reasons why most relationships crumble. This is why it’s wise to say no, especially when you feel loan purpose doesn’t make sense, you can’t afford the amount they need, or any other reason. Your loved one might feel like you’re refusing to help them out, so make them understand your reasons for turning them down, safeguarding your relationship.

Endnote

Lending money to family and friends isn’t wrong. However, the emotional attachment causes some of them not to repay their loans, derailing your financial goals. Use these tips when lending money to your loved ones to protect your interests.