Loaning money to family members is an especially risky endeavor. Not only can you potentially lose your money, but you may also damage your relationship, as well.
Still, it can be hard not to help someone close and in need. So if you choose to lend, here are three common situations you may encounter along with some tips to possibly avoid problems:
The Borrower May Drag Their Feet on Paying You Back
Your friend or family member may fully intend to pay you back initially, but priorities can shift over time in a way that’s not good for the lender.
This is why some lending institutions may need to institute late payment penalties, such as issuing late fees and issuing derogatory marks on your credit report.
You, unfortunately, won’t have all of these tools at your disposal. As such, you may find that person’s sense of responsibility isn’t enough to compel them to keep up with timely payments. As a friend or family member you may be willing to accept these risks in order to help out, and that is commendable!
Options to potentially avoid some risks:
You have limited tools at your disposal to encourage payment, but there are a few tactics you can try.
For one, you can agree on some late penalties, such as a flat fee for every payment not received by a specific monthly date.
Also, you might consider charging interest on the loan. That way, the longer they take to pay you back, the more money they’ll owe.
However, keep in mind that playing a banker role in a personal relationship could create friction. You may just have to adjust your expectations to not become upset when the process takes longer than what you agreed on.
It May Damage Your Relationship
You may think that lending money strengthens a relationship. But the opposite can be true.
One survey by LendingTree found that more than 50% of people who gave their family or friends money for an emergency said they regret it. Further, 1 in 6 of these unhappy lenders said that the relationship was damaged or destroyed by the arrangement.
Options to potentially avoid some risks:
Perhaps the only reliable way to insure against relationship damage is don’t lend money you can’t afford to lose.
You might even consider giving the money away instead; that way, you can’t really be let down. Then you can let the person repay you when and if they want to.
Alternatively, you could try to re-direct your would-be borrower to an emergency personal loan service. If they’re unsure if they could qualify, some lenders will let your contact see if they pre-qualify online with no impact on their credit score.
You Could Lose Your Money
In many cases, lending between friends and family is a handshake or verbal agreement.
This informal approach can make it less likely that you’ll get repaid. The borrower may dispute loan terms, argue that the money was a gift, or simply disregard the agreement.
Further, if the need arises, it may be much harder to prove you lent money that you are entitled to get back.
Options to potentially avoid some risks:
Before loaning money, you could get a loan agreement in writing. Include not only the amount to be repaid but also a repayment schedule including a final deadline and any interest or late fees.
If you’re unsure how to do this, try performing a web search to find a “free loan template.” You’ll find many downloadable sample contracts that you can customize to your liking.
Although these documents are no substitute for professional legal contract services, having everything in writing is almost always a better alternative.
A Friend in Need Presents Risk Indeed
It’s hard to tell friends and family “no” when they’re in a jam. And in many cases, people do make good on their obligations.
Still, financial matters are a common source of relationship problems that may be hard to avoid. It might be best to consider redirecting would-be borrowers to other sources of financial support .
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