How to successfully lend money to your friends and family
Money is often a point of contention for a lot of people. In fact, it is one of the main reasons for divorce in the UK. Therefore, people often say that lending money to your friends and family is really not a great idea as it can cause mass upset. But this does not have to be the case if you are organised and responsible when lending to your loved ones. It is also appreciated that it can be hard to turn down someone who means a lot to you who has taken the courage to ask you for some financial help – many would find the simple act of asking embarrassing.
It is important not to be blinded by your love for the person you are lending too. You need to treat it as if you were lending money to a complete stranger and be smart about how you are going to set up the terms and the schedule for the repayment from your friend or family member. If you treat it this way, you should find it a whole lot easier. Of course, it also relies on your friend or family member being organised and responsible to avoid feuds.
Chances are if your loved one is asking you for money, they are far enough into debt that they would not receive a traditional bank loan. If you are against the idea of forking out cash from your own pocket, you could point your friend towards taking out a Guarantor Loan and even act as their Guarantor, should they qualify.
If you do want to go ahead and lend to your friend or family member, here are some tips to help you do it well.
Deal with Cash Only
If the borrower asks you to open a credit card in your name for the use of them, you should not agree to do this as this can get extremely messy. You should never put yourself in a position where another person’s actions can affect your credit score and your ability to borrow or secure further credit.
You are able to control cash and the lending of cash will not directly affect your credit score in any way.
Draw up a contract
It is best to have the terms of your lending in writing so that you can refer back to it if anything were to be compromised. In the contract, you need to set out the exact amount they are borrowing, when you are to be repaid and how. You should make clear any late repayment fees and what happens if they do pay late or cannot pay at all.
Everything should be set out clearly before any lending is conducted. Make sure both you and the borrower sign the contract so that it is official.
If you are going to charge interest, this should also be present on the contract. Many people would feel uncomfortable with doing this, but doing so can act as an incentive for the borrower to pay back the loan you have given them. It can also protect you from being charged gift taxes on the money you are lending out.
Only lend what you can afford
There is an old saying that you should never bet what you cannot afford to lose. The same should go for loans. Do not lend beyond your means, even if your friend or family member is in need.
Because you may never get the money back, you need to weigh up whether you can forgive the debt in order to save the relationship with that person. If the amount they are asking fro will break you financially, do not lend it.