10 Vital Rules To Follow When Lending Money To Family And Friends

By BankBazaar | September 12, 2017

10 Things To Keep In Mind When Lending Money To Family And Friends

Giving hand loans is a commonly accepted practice in our country. Hence, it’s difficult to say ‘no’ when a friend or a family member come seeking monetary help; even if you are cash-strapped, or reserving funds for a planned expense.

Another problem in lending money to family and friends is the uncertainty around repayment; there is no repayment schedule and no guarantee that you’ll get your money back. And even though you have done the kind act of helping a loved one in a bind, you could feel like a villain asking your money back.

So, what measures can you take to secure such unofficial loans, and also your relationship with the borrower which might come under the strain of such a transaction? Here are 10 useful tips.

  1. Cash Only

Always help with cash. Never lend your Credit Card, or agree to sign up as the guarantor for a loan that your family member or friend might be taking. If you give cash—in the worst case scenario, your money won’t come back. There is nothing more to lose. By lending your Credit Cards or standing as a guarantor for a loan you stand a chance of having your credit score hurt, along with losing the money.

Let’s say, your friend needs Rs. 10,000 urgently, and you lend him/her your Credit Card. What if your friend doesn’t swipe, but makes ATM withdrawals using your card. Cash withdrawal charges extra! Moreover, if the borrower doesn’t return the money before the due date, the burden to pay the bill is on you. So, if you must, always lend cash.

Additional Reading: Credit Card: Myths And Facts

  1. Have The Means

Only spend what you can afford. Likewise, only lend what you can afford. When lending to family and friends, remember that your money might not come back. With this in mind, decide the amount you can part with. Make sure it’s nothing too big to throw your finances off balance. Your friend or family might have requested a mammoth amount, but you must dole out only what you can afford. Lending anything above what your budget permit will result in regret, and regret is known to sour relationships.

  1. Deep Impact

Impact on your finances is one. Here we are talking about the impact on your relationship with other family members. Scratching your head? Well, it might so happen that you lend money to one family member or a friend while having refused another one from the same circle. Now word tends to go around. This will put you in bad books of the rest of the clan. You will be seen as displaying favouritism.

Though the borrower will be very thankful for all your help, other family members and friends might not take this selective helping very positively. Yes, it’s quite possible that you helped one over the other because at you had the means to at that time. But how will you explain?

  1. Ask For Specifics

It might feel rude to ask your family and friends the purpose for borrowing money, but knowing the reasons will give you some sense of security. If the reason is legitimate, most will not hesitate to share it with you. If you sense some form of reservation, or the borrower turns red in the face, calling you audacious for questioning, then my friend, something is probably amiss. In the latter case, you can perhaps suggest that the borrower apply for a Personal Loan. It’s a no-questions-asked loan.

If you are given a reason, gauge it for its authenticity. We’ve all heard stories of friends and family borrowing under the guise of a genuine problem only to use the money for recreational spending or to shop luxuries. Make sure you don’t fall victim to such deception.

  1. Take Interest In Charging Interest

In some cases, you might feel impolite charging an interest on the money you lend. Doesn’t it defeat the purpose of a friend or a family member approaching you for money? They are trying to avoid paying interest. But you too are parting with your money and losing out all the interest you could have earned. So, if the situations permit, do talk about interest. You can, of course, charge lower than the running rate of interest in the market.

Additional Reading: Everything You Need To Know About Personal Loan Refinancing

  1. Set The Terms

We often don’t ask about repayment when money is given to friends and family. We leave it to the borrower to provide these details. Well and good if the borrowers tell you how and when s/he will repay. But if it’s not specified, don’t be embarrassed to ask. Knowing how the repayments will come through will help you plan your budget better. Also, do not hesitate to tell the borrower about your loan and Credit Card payment dates. This will make them return your money responsibly.

  1. Have The Deal Signed

A common idea behind hand loans is that the agreement is based on trust, friendship, and blood ties. Though these are strong notions, they hold little value if the borrower falters on repayment. Nobody is asking you to draw a full-fledged deal on stamp paper and get it sealed by the notary. Just a little hand-written note signed by the borrower. If the borrower appears to have conveniently forgotten about the monetary help, at least you have the note to speak your side of the story. No harm in having a witness or two.

  1. Contingency Plan

In spite of all the terms set for the deal, the borrower might still falter. At such a time, you shouldn’t find yourself shocked. Prepare for all the things that can go wrong. A delayed payment, no repayment at all! This is especially important if you are depending on repayment to pay your bills or EMIs. Do you have enough to tide you over even if you don’t get back the money?

  1. Don’t Be A Control Freak

You have definitely helped a friend or a family member by lending them money, but this doesn’t entitle you to pass judgements on how they live their life. Yes, people do that. They lend money and then try control how the borrowers live his/her life, especially the financial bit of it. Do not do this. You will be setting fire to a wonderful relationship. Mistakes don’t always happen from the borrower’s side.

After lending money, let the borrower live in peace. If the dues don’t come on time, give the borrower some grace period and then send a gentle reminder. Maybe the person is not evading you but is in genuine trouble.

  1. Learn to say ‘No’

It’s very unpleasant to say ‘no’ when somebody close to you asks for help, especially monetary help. But if your finances don’t permit it, or if you are not comfortable lending money, it’s better to say ‘no’ than trouble your mind and soul. There are other ways you can offer help – paying certain bills or buying groceries. This way you won’t even feel guilty for refusing.

No is also a good word to say if a certain friend or a family member repeatedly borrows money or has a reputation for being a bad money manager. The person might take you for granted if you keep giving money again and again; and then during once such lending-borrowing game, the money might not come back at all.

Summary

It’s advisable to never lend money to the family or close circle. Things get complicated and awkward. But sometimes you cannot avoid it. So, we present to you a solution that will work in your favour and that of your friends and family.

Help them get a loan. There is no financial problem that a Personal Loan can’t solve. Often people approach the inner circle for financial help because they are intimidated by the loan process. But we know that applying for a loan is no more a cumbersome task. Just go online, compare and apply. Help your acquaintance-in-need with the process. Help them find the perfect Personal Loan and work with them to get the documents together. Doesn’t matter if you can’t lend money. You are helping them find a solution to their problem. They’ll be grateful for all your help.

Additional Reading: Top Home Loans, Car Loans, Personal Loans & Credit Cards-August 2016

At this juncture, allow us to help you with a range of Personal Loans. Just click the button below and you’ll be presented Personal Loans from banks you know and those that you don’t. You too might find a loan to pay for that house renovation you have been delaying for a while now.

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