Whether you're a borrower or a lender, loans between friends and family members can get complicated very quickly. Borrowed money creates a layer of tension and can strain the strongest of relationships, despite the best of intentions. Is it possible to borrow or loan money and keep your relationship intact? Perhaps, but there are important considerations for both parties to help ensure a successful transaction.
For the Borrower:
- Consider the reason for your request. If you are asking for a friend's or relative's financial help, make sure it is essential. There's a huge difference between borrowing money for a reliable car to get to and from work or school clothes for your children, compared to borrowing money to get a sexy new sports car or the latest pair of designer shoes. The latter two do not fall under the category of "essential."
- Friends and family are a last resort. If you need money to start a business, go back for a graduate degree, or buy a new home, go through traditional channels first, such as a lending institution or student loan provider. If most have turned you down, be prepared to hear the same from your friends and family. Remember it is not their obligation to get you out of debt -- it's a favor.
- Offer proof of your trustworthiness. Explain how you plan to repay your debt, and give them a time frame in which they can expect to be repaid. If you have something they can hold as collateral, don't hesitate to offer a piece of your valuable jewelry, or expensive artwork to prove your commitment to paying the loan back in a timely manner.
- Put the agreement in writing. Document all the details, including when payments will begin, when they will be made, the amount of each payment, and what, if any, interest arrangements which you and your lender have agreed upon. By doing this, both parties will have a written record of the original terms of the loan. This recorded agreement will be invaluable if things get tense and memories begin to get cloudy.
- Consider the consequences. As the old song goes, "Money changes everything." Being in debt to those closest to you can put you in a very prickly position. If you buy a stylish new pair of shoes while in debt, you can bet that your lender will notice. If you lose money from grandma's nest egg, how will you feel at the next family dinner? Also, if you accept money from someone close to you, how will your debt influence your personal decisions? Imagine a friend saying to you, "You dress better than I do, and I am the one that loaned you the money for that new bag."
For the Lender:
- Anticipate default. Don't make the loan unless you can afford to lose the money outright. Regardless of the borrower's promises, things happen. If they are using loaned money to pay bills, they probably have not been the best stewards of their own financial resources and will most likely have difficulty paying you back. If they are borrowing to start a business, there is no guarantee that their plan will be successful and even if they are, you may not see that money for a long period of time. If you still want to help, only loan as much as you are able to lose. If, and when, you are paid back, consider it a pleasant surprise.
- Just gift it. If you are in a position to help and would genuinely like to do so, consider making a gift instead of a loan. By stating up front that you are not expecting a repayment, you are eliminating a lot of the anxiety that goes along with a loan. While it's probably not a wise decision to make a habit of loaning money to family and friends, there are times when you have the money, and they need the money -- and it's a win/win for both parties.
- Offer an alternative. You may not be willing or able to lend money, but you can offer assistance in other ways. If your family member must choose between rent and food, offer to make meals for a week or watch the kids while your friend works an extra job, or goes on job interviews. As an added gift, give a gas card or gift certificate to cover some daily expenses. You are showing goodwill without impacting your financial situation.
- Resist pressure. You may have a reputation as the "rich cousin," with a fat bank account and fancy job that leads loved ones to believe you can certainly afford to lend a few bucks. Unless you truly want to offer the help, resist the pressure to lend money just because you have it in your account. Explain it this way: "I am working toward my own financial goals right now, and lending money is not part of my plan." You owe very little in terms of an excuse, but may feel like something needs to be said, "I'm sorry Liz, I don't have additional funds available. I wish you the best of luck." You are under no obligation unless you truly want to help and the cause is worthy.