Five Basic Rules to Follow When Lending Money to Friends and Family
Getting a loan can make you feel like you are stepping into a minefield. In today’s economy, it is easy to see how someone can find themselves financially in the dark. On the one hand, you want to help a loved one who needs it.
This article originally appeared on LearnVest .
On the other hand, you’ve heard stories of credit problems, breaking friendships, and family separation. “Plus, you can drain the funds you might need yourself,” says Irene S. Levin, Ph.D., psychologist, author and producer for TheFriendshipBlog.com . Even if you are confident that the petitioner will refund your money, it is difficult to know if you should continue.
To help you make the right decision, we asked financial experts to share five key points to consider before hacking into your wallet.
Rule 1: Only say yes if you are serious.
If you feel guilty about giving a loan to a petitioner (“I’m desperate!”), Or doubt your own doubts (“I must be a bad person, otherwise I won’t feel contradictory”), then give it up. – says Levin.
If you cough up money when you’re not sure what you want, you run the risk of feeling resentful, which can ruin the relationship before she even has time to repay you. Failure to meet a loan does not make you selfish or a bad friend; “The answer can really protect your connection,” she adds.
Levin offers to kindly refuse, saying: “I would really like to help, but now I do not have extra money to borrow.” If you feel like you need to explain further, mention unexpected expenses you’ve recently gotten into, like higher health insurance premiums or something you need to save on, like your kids’ college education.
Suggesting to help brainstorm other loan sources or ways to reduce her debt (if such is the case) may be the next thoughtful step. A real friend or relative will be willing to accept a rejection and thank you for any additional help. If she doesn’t, it’s best to let your relationship deteriorate before you spend your money.
Rule 2: borrow as much as you can to lose
Your friend or family member can check all the boxes for reliability, financial stability, and reliability, but “things can happen that prevent them from refunding you according to their original plan,” says Byron Ellis, Certified Financial Planner (TM). and the managing director. at Ellis and Ellis, United Capital’s financial advisory unit in Woodlands, Texas.
If your loan recipient gets stuck, your best friend or family member will be at the end of the payback line, “behind a mortgage company, credit cards, car loans, etc.,” says Ellis. Now imagine your stress level and the tension that could arise between the two of you if you really need that money and she can’t pay you back.
Bottom line: Be prepared for the worst by only giving back the amount that, if not returned, will not jeopardize your own savings, ability to pay bills, or other relationships.
Rule 3: Create a Hard Maturity Schedule
Ten years ago, Emily White, 43, loaned her little sister $ 20,000 to buy a house next to their elderly parents without discussing the date of the loan. “I loved having my sister next to my parents and the idea was for her to give me back the money when she got a job and found a new job as she moved from another state,” White recalls.
But as it turns out, White’s sister seemed to have a different idea in mind. “Now she has been in business for many years, but has not mentioned anything about payback,” says White. “I had no idea that we had a 10 year plan counting. I would not be upset, but now I am thinking about investing, and this money will help. “
White’s mistake was that she thought she and her sister were on the same page when it came to paying off the debt – a situation that could have been avoided if she had a thoughtful plan.
It might sound too businesslike, but “set specific loan terms that everyone can agree to,” says Ellis. “Discuss how much money will be lent, interest rates and how long they will have to pay back.” This way, she will know when she needs to receive funds, and you will know when the money will be returned to your account.
If you make a schedule like this, that money also can’t be mistaken for a gift, ”adds Ellis. The borrower also cannot postpone repayment indefinitely and declare that he did not know that you would need it so soon.
As Ellis mentioned above, it’s also wise to charge interest and include it in your repayment schedule. Depending on the amount, obtaining a loan may involve complex tax rules; refusing to charge interest may cause you problems. To avoid this, you can charge the borrower the applicable federal rate (APR) as interest.
Rule 4: always report your loan in writing
Memories fade, priorities change, and conflicting opinions about what you originally agreed on can cause problems between friends or family, ”says Priyanka Prakash, finance specialist at Fit Small Business and former business lawyer.
Another advantage of having the amount and terms in writing: drafting an official loan document increases the likelihood that the borrower will take the loan seriously and repay it on time. “So if you miss a payment, we’ll take a look at this piece of paper to help us decide what to do, so it takes friendship out of the way,” adds Ellis.
When 49-year-old Registered Nurse Lisa Schloeder decided to help her colleague enroll in the Nursing Assistant program, she wanted to complete a $ 1,500 loan agreement on paper. “I saw this woman in the office every day, but I still thought it was best to put it in writing to make sure we both understood what we were getting ourselves into,” Schloeder recalls.
Her foresight paid off. “Every two weeks I got a check, as we agreed, and I felt great seeing what a wonderful nurse she has become for our practice,” she says.
According to Prakash, you can draw up a simple personal loan agreement without hiring a lawyer. But for more complex transactions — for example, those involving collateral or more than $ 10,000 — a lawyer may be required.
Ideally, the loan agreement should be dated and contain an indication of the loan amount and maturity date.
for full payment, the schedule of payments and any agreed late fees (see Rule 5) or interest. According to Prakash, the complete contact information of the borrower and the borrower is important, as well as both of your signatures, handwritten or electronic.
If lenders need help putting together a formal paper, they can opt to search the internet for a bill of exchange template that says a promise to pay someone back and can help ensure that all important details are covered. In most states, a promissory note must be signed by the borrower to be valid, but it’s better if you sign too so that the intentions of both parties are clear if you have to go to court, Prakash says.
Rule 5: Never Let Your Deadline Slip
If your dinero does not arrive on time, it would be a mistake to ignore being late or apologize for not opposing the borrower. She may continue to act as if the deadline you set is not a rule, but a general guideline.
Make it more business-like so neither of you feels like you are using the other. “I did this the last time I loaned money to a friend,” says Ellis, suggesting that you include details of the late fine in your written agreement; the friend will have to pay a fine in excess of the normal payment. We hope this tactic saves you the hassle of sending reminders … and saves you any regret about your decision to play banker.
A five-day grace period, according to Ellis, is smart before hitting your friend with a fine, as things do happen. If the signs point to a more serious late payment — a number of scheduled payments have been missed, and numerous follow-up emails or phone calls from you are being ignored — it may be a good idea to consult a lawyer. “If the borrower still doesn’t pay, you can sue him,” Prakash says.
In a scenario where one lump sum is paid after receiving a long-term loan, it never hurts to send a reminder email one month before the due date to show her that you are adhering to the terms. For example: “According to the agreement we signed, the loan I gave you must be repaid on June 15th. I have attached the original in case you would like to refer to it. So glad I was able to help out my cousin.
* Names have been changed.
The Golden Rules for Lending Money to Close Friends or Family | LearnVest