Four Tips to Lending Money to Loved Ones
You’ve probably heard horror stories about folks who’ve lent money to friends or family members and got burned for their generosity. While this shouldn’t stop you from helping your loved ones, below are a few tips that may prevent anger and resentment should your arrangement fall apart. If you’re going to hand over money to someone, it’s best to be prepared for whatever the outcome may be.
Talk to yourself first
Take some time to think about whether or not you expect to be repaid. This is the number one way to avoid misunderstandings, hurt feelings, and damaged relationships!
- Can I afford this? If you don’t expect to see the money again and really can’t afford to gift the money, then the best answer is “no.” Another solution may be to gift a portion of the money requested if the borrower can find the rest elsewhere. On the other hand, if you can afford to give the money but still don’t expect to be repaid, then make it an outright gift (and bless you for your charitable nature!)
- How much can I afford to lend? Often, people lend money regardless of whether or not it fits their own finances. A word of caution - don’t let your loved ones financial problems become yours too. Regardless of how careful you may be with this transaction, you may never see this money again. Therefore, don’t lend out part of your kids’ college fund, or dip into your retirement accounts to make a loan you can’t afford.
- How will this affect my relationship with the borrower? Whether you say no to the borrower or go forward and lend the money, either decision is bound to have an impact. It’s not unusual for close relationships to fall apart or become strained over money when things don’t work out. Consider how you’ll handle any fallout with your loved one if you don’t get the money back.
By lending money, you may also be prone to evaluating the borrower’s financial decisions and priorities. For instance, while they may tell you the money will be used for an important financial matter, press for actual details. The last thing you want to find out is the money was used to buy a new 60 inch TV or a gambling trip to Vegas!
Now talk to the borrower
The potential borrower is a loved one, either your friend or family member. If you’re being approached for money, it’s important to be able to discuss the loan honestly (although this may not be an easy conversation to have.)
- Why do you need the money? Although you may put it more delicately, you want to make sure this is a one-time issue like a car breaking down or an unexpected medical bill. You don’t want to feed a poor money management lifestyle if it won’t solve the problem.
- Are there other options? Has the borrower looked into other options? What are they, and why don’t those work? For example, even if their car needs major repairs, maybe they can carpool to work with co-workers, borrow a car temporarily until they can save for repairs, or use mass transportation. While none of these options are ideal, the borrower should show some problem-solving initiative other than simply asking for money.
Another option is to talk with one of LSS’ certified financial counselors to review their financial situation. This may be especially important when it looks like the money crisis is bound to happen again due to poor financial skills. - What is an affordable payment plan? While the payment amount should be workable for both of you, you should determine a figure that fits the borrower’s budget. A monthly payment may make it easier for the borrower to stay current by getting into the habit of regular installments.
For more convenience to the borrower (and greater certainty for you), consider having the payments automatically withdrawn from a borrower’s bank account.
Write up a loan agreement
These days it is fairly easy to find sample documents online to help you craft your arrangement in writing. So, take a look to see if any of these work for you and simply change them as needed.
On the other hand, the document does not have to be complicated or full of legalese. In fact, the simpler and more straight forward it is, all the better! If there’s ever a problem, you don’t want the borrower claiming they didn’t understand the agreement.
Think about the terms of the agreement such as the loan amount, payment amounts and frequency, repayment duration, the amount of interest being charged, and consequences for missed payments or loan default. If your plan is to be able to prove your loan agreement in court, you want the specifics spelled out.
Consider carefully collection activities
If the borrower starts missing payments, reach out to try to find a workable solution for you both. If unsuccessful, you may have to talk to a lawyer or take the borrower to court. But be sure to ask yourself if trying to collect is worth the time, additional money, and frustration for you. Sometimes it is instances like these that become the best life lessons for us all!
At LSS, we empower people to take control of their debt. Trust me when I say, we understand that overcoming debt is a tough challenge, but we know you can do it.
Our Debt Management Plan (DMP) serves the dual role of helping you repay your debts and helping creditors to receive the money owed to them. A DMP consolidates your monthly bills into one simple payment--often with a lower interest rate--so you can start paying off those debts and return to financial health faster. Give us a call today at 888.577.2227 or visit our website to get started!
Author Barb Miller is a Certified Financial Counselor at LSS Financial Counseling and specializes in Bankruptcy Education and Student Loan Counseling.