Do you have a family member or friend who needs to borrow money to make it through? Do you want to help but are afraid they may take too long to pay back you’re their loan from you?
Now, millions of Americans are taking on so much personal debt. Even before the COVID-19 crisis, the major consumer credit agencies saw double-digit growth in the money-lending market. In 2019, the reported average personal debt is over $16,000.
A lot of people borrow money to pay back one debt, then another and another. A lot of people turn to family members to help them when they can’t borrow from other sources anymore. In this guide, we’ll show you the right way of loaning money to family and friends as well as how to lend money to them.
1. Why Lend Money to Friends or Family
The average American family has a consumer debt of $32,838. That already includes auto loans, credit card debt, mortgages, and student loans. Add to that the taxes and insurances taken from your pay and anybody will feel like they’re on a sinking ship.
When a person can’t afford to be in any deeper debt to a bank or lender, what does he or she do? If he can, even if he doesn’t want to, he turns to his family or friends for financial help. Some are more than willing to help out while others may need a little more convincing.
Still, who better to help them than family members? Who else can they turn to and trust won’t judge them than their real friends? They trust that you’ll give them the benefit of the doubt when strangers won’t.
However, you must keep your eyes open and wallet before loaning money to people you know.
2. Risks of Lending Money to Family or Friends
Lending money to family isn’t always easy. It’s understandable if you’re hesitant to lend money to someone you know. You may have heard of stories about people who abuse the goodness of their family and friends.
Or you have a good understanding of yourself and their personalities, too. You may know that you’re not very good at drawing a line or saying know. You may know that they can push others to bend to their will without thinking about the consequences for others.
It can lead to a relative or friend cutting off from you to avoid paying you back. Unlike banks, you don’t have any safeguards against the risk of default. If this happens, you’ll only end up losing money and trust.
Speaking of trust, the matter of money is poisonous to many good relationships. It can damage your status within the family if you lent money and asked for interest. It can also destroy friendships if your friend made the bad guy for hounding them on their debt.
Sometimes, you don’t have anything to loan them at all, no matter how much you want to help. You’re not a bank that others can withdraw money from at a snap of a finger. In the same vein, people you loaned money to won’t always have money at the ready to pay you back when you need it.
3. Benefits of Lending Money to People You Know
Loaning money to a friend or family member won’t always lead to a bad outcome.
If all goes well, it can be beneficial to you and the borrower. Trust and forbearance are more likely to develop after a loan/debt gets handled well by both parties. You can also agree to loan terms that benefit both parties.
Borrowing money from a friend or family member also benefits the borrower. In most cases, they pay no or much lower interest rates than traditional lenders charge. Later, we’ll discuss why it’s essential to add interest rates to any money you lend to anyone.
4. What to Consider When Loaning Money
Treat the event of lending money as a business venture. You can allow for smaller interest rates, but don’t involve your emotions too much. If possible, try to distance yourself from them until the loan gets paid in full.
If you don’t know how to lend money, it’s better to get the basics of it down. If you don’t know the terms used on loans, try to educate yourself with it. This will be useful if you want to lend money from banks or other lenders later.
Above everything else, protect the lender. Get the agreement in writing, talk to an attorney, and encourage deposits from banks. It’ll also be better for you if you took collateral to secure a loan, especially large sums.
Consider the impact of your agreement to the borrower and yourself. Consider your needs as well.
You must never open a credit card using your name or co-sign a loan. Only loan cash and nothing but cash. An irresponsible borrower can affect your credit score or your ability to loan in the future.
5. How to Lend Money to Family or Friends
When you lend money to family members or friends, you must first consider how you preserve the relationship. This is especially vital when you’re lending money to relatives.
You can do this by discussing the loan terms in full detail before you bring out a single penny. If any of the parties (borrower or lender) have spouses, involve them in the discussion.
You must discuss every detail of the loan. Don’t assume that the other party’s view on finances is the same as yours.
Talk about worst-case scenarios and how you’ll proceed from there. If you’re using family money, talk to your family about it. You can know more about family conversations on family money by checking out the resources from Jasdeep Singh.
After you discuss every single detail with the borrower, sign the agreement. From here, you can now hand over the money you loan.
Lend With Caution and Care
That’s it for our guide on how to lend money to family members or friends. We hope you picked up something valuable and helpful from this guide.
But why stop here when there is so much more to discover? If you want to learn more about loans and loaning money, check out our other guides now. We offer tons of content so feel free to read through them today!
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