If you are considering lending money to friends or family members, this article discusses what you should consider, and how you can increase the likelihood of having your loan repaid.
Private loans between family members and friends are a convenient, flexible and cheap alternative to using commercial loan organisations such as banks or pay-day lenders.
Many people in need of a loan will first approach relatives or friends who appear to have money to spare, especially if the borrower does not have a good credit history, or is just starting out financially.
The lender may have good reasons for making the loan which are not financial, for example parents may lend their children money for university or to help them buy their first home.
Consequences of loaning
Whatever the motivations are for such private loans it is important to be aware of the potential ramifications of introducing financial matters into a personal relationship.
For example, the lender might appear to gain power over the borrower, or siblings who have not received similar loans could become jealous of those who have. Even worse, what if the borrower can’t or won’t pay back the loan?
To avoid such damaging implications (to relationships or finances) it’s a good idea to first consider carefully whether to make the loan, and then formalise the terms of the loan and repayment arrangements in a written agreement.
Can you afford it?
Think carefully about the consequences to your personal relationship with the borrower. Of course there are implications to denying the loan as well, but at the end of the day it is your money and your decision. If you have real fears about the possible consequences of the loan these will outweigh the (usually temporary) bad feelings resulting from refusing to lend.
Can they afford it?
Next you should think about whether the borrower can afford the loan. Will they be able to repay it within a time-frame that you are happy with?
Sometimes in these situations the ‘borrower’ is really looking for a gift and has no real intention of repaying the money. This may not even be a conscious decision on their part but it is essential to be clear on this. You might even decide that you want to make a gift (perhaps of a smaller amount) avoid bad feeling and potential complications associated with a loan – but both parties should be aware of the decision to make a gift and why.
Of course, you will want to know why they want the loan, and this could affect your decision to give it. If you can see they need the cash for a good reason but don’t trust their ability to manage the money you lend them, why not offer to pay it directly to where it is needed?
On the other hand they may be perfectly able to approach a financial institution for the loan but are looking for a cheaper alternative – it’s up to you whether you want to oblige.
Using a written loan agreement
If, after addressing the above questions you still want to make the loan, you will probably have thought of a number of conditions in the process. Hence it is clear to see why a written agreement is a good idea. By setting out payday loans Kansas your conditions in writing, both you and the borrower can agree with full awareness of those terms and the repayment.
It may seem quite hard-nosed to insist on a written agreement when dealing with friends or family, but it is the best way to separate your personal relationship from a financial relationship, and to acknowledge that personal ties should not influence or be influenced by financial responsibilities. If there is reluctance to use such an agreement then complications exist already!
