The current financial climate probably means that you have family members and/or friends who could use a little financial help. They might even come to you looking for a little loan. Lending money to family and friends is always tricky, since nothing can destroy a good relationship like a fight over money. If you feel like you want to help by lending your family member or friend money, here are some tips that could keep your relationship intact:
1. Don’t Lend Money in the First Place
The #1 tip for lending money to family and friends is not to do it. Working out the terms of a loan can be messy, and it requires discussion about sensitive money topics. Consider making the money a gift, rather than a loan. Get yourself in that mindset, and don’t expect anything back. Make sure you examine yourself to ensure that you aren’t going to have bitter feelings over your gift down the road, and make sure you can make it a true gift, without expecting anything in return.
You can also consider alternatives to giving money. Offer to babysit children while your friend or family member looks for a job. Buy groceries on an occasion, or provide a gift card to the local grocery store. Be available to help with transportation, let your friend or family member stay with you for a couple of weeks, or look for other ways to fulfill needs in a non-monetary way. If you aren’t comfortable handing over cash, find other ways that can help alleviate the stress related to a money crunch.
2. Be Clear About the Terms
If you decide that lending money is the way you are going help, you need to be clear and up front. This means you have to power through your discomfort of talking openly to others about money, and just lay it out there. Find out what the money is needed for, and create a repayment plan. Make sure you are clear in your expectations for payment. It can help to create an installment plan, starting in a few months, so that your borrower does not feel the pressure to pay it all back at once.
You can also discuss interest. Many people prefer not to charge family and friends interest. However, if you want to, you can arrange for a low rate of interest. Just remember that if you receive earnings from the interest, you will have to report it on your taxes.
3. Create a Contract
After you have hammered out the details of the loan, it is time to create a contract. Contracts entered in via email or text message are binding, so that can be helpful if you are arranging a loan over a distance. Make sure that everything about your loan is included in the contract. Spell out the terms, and make sure that the borrower explicitly agrees to the terms. You can even get a template for such contracts, although a simple email with bullet points works as well. A witness might even be helpful in sealing the deal and making it official. Try to make it clear that the loan is a business/professional relationship and not a personal one.
Use a 3rd party to enforce the contract. One way to formalize the loan is to use a 3rd party service, such as Lending Club or Prosper. The family member can list their loan on either of these services and you can agree to fund all or a portion of the loan. An added benefit to you is having a strong legal basis for the loan, and potentially other lenders to take some of the risk, and the borrower benefits by having their loan funded and the loan counting toward their credit rating. You can learn more about these companies at their official sites: Lending Club, and Prosper.
4. Show Consistency
Finally, make sure you are consistent in your policy of lending money to family and friends. This is important, especially if you have other family and friends who may need help. Offer the same terms to others, unless someone else shows a higher risk. Develop your own “credit scoring” method that can help you explain why someone might be “approved” for more money, or a lower interest rate (assuming you charge interest).
Bottom line: Things can get messy when money is involved. Before you lend money to family and friends, consider your situation, and think about the consequences, financially and emotionally, that could arise from acting as a lender to your family and friends.