Wednesday, October 12, 2011

5 Rules When Loaning Money To A Friend

Various Federal Reserve Notes, c.1995. Only th...Image via WikipediaBorrowing money from a friend is the fastest way to ruin a relationship. The borrower usually has tried every other source for credit. Their credit cards are maxed out. The house is mortgaged fully and lines of credit are closed. The party may have lost their job or an emergency has happened. By the time they get to you the situation is desperate.

In this time of recession who doesn't know someone or a family who is having very hard times. They were unprepared and life hit them broadside. You want to help because your friend is in need. But should you? Will they be able to pay you back. 

They probably will, but be prepared to lose the money. Through their own fault or fate they are showing their lack of financial knowledge. The mistakes they made could possibly be made again with your money. If you must make a personal loan why not take a few precautions and do it right.

1. Consider alternatives

Borrowers who fail to repay bank loans may face legal problems, but those who can’t make good on loans to friends or family can be hit not only with legal trouble but also the loss of a personal relationship. That’s why it’s a good idea to think about all your options before approaching someone you’re close to for a loan. Consider trying more than one bank, for example, or exploring borrowing possibilities at credit unions or other sources. It may also be possible to cut back on your spending instead of taking a loan or to postpone your plans for a big purchase until you have saved the money you need.

2. Get it in writing

One of the potential pitfalls of a loan between friends or family is their informality. A handshake is a popular way to cement a deal, but a written document is a better idea for both sides. That’s because problems can arise when the friend lending the money expects it to be returned within a short time, while the borrower believes he or she can pay it back over an indefinite period. When lending money to a loved one, it’s often hard to insist on knowing when the loan will be paid or to ask for regular payments. 

To protect your relationship and your wallet, it’s best to put it in writing. Write down the amount of the loan, when and how it will be paid off and if the borrower will pay any interest. This kind of promissory note clarifies the borrower’s responsibilities and can help prevent misunderstandings later. The note should be signed by both borrower and lender, and each one should keep a copy.

3. Be realistic

While written documentation is a great idea, remember that it will not prevent potential payment problems. That’s why it’s important for both people to be realistic before they enter into the deal. If you know that a loved one likely won’t be able to repay you, for example, offer instead to help him or her solve problems by developing a monthly budget or working out a payment plan with creditors. 

If you are uncertain you will be able to repay a loan, consider asking loved ones to brainstorm other borrowing options. Doing so may preserve your relationship so that it is still in force long after any money problems are over.

4. Give honest updates

If you borrow money from a friend or family member and find that you are unable to repay it as expected, let them know about the problem right away. Explain what went wrong and when you do think you’ll be able to make good. It may be a difficult conversation, but your candor and consideration for the other person will go a long way in helping to preserve the relationship.

5. Give the money as a gift.

Personal loan are notorious for not being repaided. If you have the means, offer them the money as a gift. If not the full amount, a percentage of the amount needed. Doing this heads off a possible confrontation or uncomfortable situation that could come down the line. It's better to keep the friend and lose the money instead of the reverse.

1 comment:

  1. Here are my 5 rules:

    1. Don't do it unless you are willing to lose the money and the friendship.
    2. Don't do it unless you are willing to lose the money and the friendship.
    3. Don't do it unless you are willing to lose the money and the friendship.
    4. Don't do it unless you are willing to lose the money and the friendship.
    4. Don't do it unless you are willing to lose the money and the friendship.


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