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Do’s and Don’ts for Borrowing Money from Family and Friends

Posted in: Money Management

Borrowing money from family and friends can be tricky. We typically suggest lending to loved ones as a last resort, but in some cases, we understand it can be one of the only viable options to overcoming financial difficulties.

In How to Help Loved Ones with Money Problems, we explore several different approaches to assisting family and friends in financial need. If you have determined a loan is the best course of action, we have developed the following guidelines that can help keep your personal relationships intact throughout the lending process.

Do Establish Expectations – Both parties should clearly communicate their expectations for the loan. Why are you offering to loan money? Or, why are you in need of money? How do you plan to fulfill the terms of a loan? Establishing expectations early on in the process can help you determine whether a loan is appropriate, and what type of loan is needed.

Don’t Lend Money You Can’t Afford to Lose – Before lending any money, evaluate your own financial situation and make sure you still have enough funding to cover your own emergencies. You also need to realize there is a chance the borrower will be unable to pay back the loan, or pay back the loan on time. Would you remain financially stable if the loan isn’t paid back? Can you be flexible with the terms of the loan?

Do Put It in Writing – Loans to family and friends should be put in writing. This will help ensure both parties are on the same page as memories fade. The terms of a loan agreement should include the loan amount, purpose of loan, time period of the loan and payment amounts. For example:

On this 10th day of January, 2015, William Smith Sr. agrees to lend William Smith Jr. $5,000 to purchase a car. Jr. agrees to pay Sr., $250 a month for 27 months for a total of $5,500. Jr. will make the payments on the 1st of each month beginning February 1, 2015.

Both parties should sign the agreement. It’s also a good idea for the lender to record the date and amount of each payment received. In the future, it may be necessary to have a record of payment history.

Don’t Respond to Negative Pressure – Loans between family and friends should only exist if both parties are willing and able to abide by the terms. Don’t lend money if you feel you are being pressured to do so, especially if the loan could put you in a dire financial situation. If you are unable to assist, stand firm and offer alternatives.

Do Consider Social Lending – Social lending has gained popularity in recent years. It encompasses sites like Lending Karma that provide consumers with online tools and templates for personal loans. They can be effective for individuals who prefer formality and tracking capabilities, but it’s important to know they usually require additional fees, which can range from a few dollars to a few hundred dollars. Don’t force this option if the fees are difficult to cover.