” Borrow Money: 13 Tips for lending money to friends and family” post is based on my experience with lending to my loved ones. I hope the readers find value out of this post. This post contains affiliate links/ads. See disclosure policy.
When I was searching for “borrow money” in Google, the things that came out are ” borrow money with bad credit “, ” borrow money near me “, ” borrow money fast no credit check “, etc.
The one thing that I didn't see is borrowing my from friends and family (i.e. loved ones). I guess it's something that people don't like to get into much less type in Google.
Lending money to friends and family is a difficult situation to be in. That's probably why a lot of people don't want to even search it online.
Lending involves emotion, commitment, and trust. It's difficult to say no especially when help is needed and you are financially capable of doing that.
I can't count how many times I've let some of my friends and family borrow money from now and never saw a dime back to me ever again. It has happened before and I have learned my way.
It's hard to say no to loved ones especially when they are in dire need of financial assistance. You can't simply say you don't have money when they somehow know or feel that you have money.
The other thing is that when you don't allow them to borrow money from you but you help others (financially), they would think something is wrong with them.
That's not a good picture to be had.
Borrowing money from loved ones may sometimes mean that
The question is, what do you do when someone you know wants to borrow money from you?
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Borrow Money: 13 Tips for Lending Money to Friends and Family
Before taking a step to helping friends and family, it is best that you consider the following:
Ask where the money will be used
Though the question may sound personal, never fail to ask where the money will be used. After all, money talk is as personal as it gets. You will feel better knowing that your money will be spent on something you know.
If the money will be spent to pay loans and other debts, then, you may want to think about lending that money. This is what I call a red flag. There is a greater chance that the borrowed money will be paid from a borrowed money and the cycle will just keep on going on and on.
Next thing you know, that person will be buried in debt. You don’t want somebody you care about be in that situation.
Investigate before you make your final decision. Just look at the way the banks and lending companies work. They won’t lend you money until they’ve researched your background.
Use your credit card
If it happens that someone needs to pay outstanding bills like utilities and groceries, you may want to use your credit card to pay those bills. This way, you have a billing cycle to pay the charge without incurring interest.
If your credit card company offers “No Interest for Months”, and your loved one needs financial help, you may want to grab such offer. It’s a win-win situation for both of you.
If the loan is not paid right away, there are still a couple of months to pay it off. Only thing is, you still need to make payments on that outstanding charge so you don’t get smacked with penalties and, potentially, interest for not paying the minimum amount.
The best thing with using credit cards is that you can earn additional bonus, points, rewards, etc. when or if you use your credit cards with perks. I always make sure I use the credit card that has a ton of rewards when it comes to allowing people to borrow money from you.
Not only do I get to help them but I also get something in return from my credit card issuer.
Deal with cash
If you happen to not like the risks involved with using credit card to help out somebody, you can lend cash instead. If your loved one asks you to be a co-signer, carefully turn down the idea.
There are ways to help your loved ones financially. It should involved you getting into deep financial problems in the long run.
You can always control your money but not necessarily your credit score if it’s tied to somebody else’s name.
Don’t be afraid to turn any requests related to credit or loan, because a misstep may cause you more than just your money. Never let yourself be in a bad situation as a result of the missteps of others.
Observe the borrower's lifestyle
If you know your friend or family member, it’s highly likely that you know the person’s lifestyle. You know whether the person is thrifty, extravagant, or anything in-between.
If you see that the extravagance results to asking for a loan, then, it is in your best interest to not lend your money.
You don’t want to categorically sustain unfit, unsustainable lifestyle. It is just not a good idea. If the person is thirty and lives a simple life and just happen to be in an unusual and unfortunate situation, then, that’s a different story.
It’s always a good attitude to help loved ones when they are truly in need.
Seek other alternatives
Research if there are alternative ways to help the person out. Just don’t lend the needed money right away. You’ll be surprised that there are other means of helping somebody than just money.
For example, if your friend needs money to have his furniture move, tell him that you’ll just help him at no cost. If he needs to buy food, tell him that you have extra food in your fridge and pantry.
It never hurts to seek other ways to help somebody out. If even after all alternatives have been exhausted, you can always go back and lend the needed money. At least, you tried your best to find other ways and your friend will most likely be more appreciative of the extra effort you exerted.
Prepare for the possibility of not getting the money back
This would be one of the worst-case scenarios but it happens often. The borrowers (i.e. your friends and family) are more likely to not pay off the loan because they would expect you to be a bit more lenient. After all, they know you well.
According to the Journal of Economic Psychology’s study entitled “Lender’s Blind Trust and Borrowers’ Blind Spots”, borrowers treat loans as if they are gifts from the lenders.
Make sure that when you loan money to your loved ones, you prepare yourself for the possibility of not seeing that money anymore. You can bother them, take them to court, and execute other means to get your money back, but you run the risk of destroying relationships and that’s not good at all.
Lend what you can afford to lose
Never lend more than what you can afford to lend.
Use the money that’s not directly tied to your emergency funds, savings, retirement funds, and the like. If you do use these funds, then, you are running the risk of negatively affecting your savings and investment vehicles if you don’t get repaid.
The purpose of allowing them to borrow money from you is to help them. Don't push yourself into helping them by putting your other safety net at risk. It's not always worth the risk (or for the most it's not).
It would be in your best interest to charge interest. According to the IRS, the annual exclusion applies to gifts amounting to $14,000. The IRS will consider the money above the exclusion as gift if you waive the interest. The party responsible for paying the taxes is you.
Taxes to be paid on gifts are based on the applicable federal rates, which is updated monthly.
Do note that there are exceptions to the gift tax rules that include, but are not limited to, payments for medical expenses and tuition.
Make a payment plan
Stress the need to have a payment plan in place.
This ensures that you are serious with lending the money and serious about getting your money back. You don’t need to remind the borrower that payment is due at a certain time and for a specific amount.
The job of doing that is no longer present if you have a payment plan in place. The plan can always be changed based on your and borrower’s agreement.
Having a payment plan signals that you are serious with allowing your friends and family borrow money from you. In addition, it also signals that you are serious with getting your money back.
That's the least you can do to protect yourself in case there are some problems that may arise when you let your loved ones borrow money from you.
Get everything in writing
Aside from making payment plan, make sure that you have everything in writing especially when a huge loan is at stake. Write the terms, the interest to be charged, repayment details, and other specific requirements to avoid misunderstanding between the parties.
Don’t forget to have the written document signed by the two of you. In the event that there’s a misunderstanding about the loan or if the borrower defaults, then, you have legal ways to get the money back.
It is to get easy with allowing people to borrow money from you especially when they are family and friends. It's always best to have everything in writing (i.e. terms and conditions and payment plans) so everyone is on the same page.
Learn to say “no”
Sometimes, the hardest thing to do is to say “No”. Just don’t say “No” without any reasons.
Personally, it's has been hard for me to say no but I have learned that I need to do it from time to time when I need to do.
When you don't want others to borrow money from you, provide the borrowers reasons for not saying yes such as that the amount is not within your budget, that you are saving for a bigger purchase, among others.
You don’t want to be in a position where you loaned the money to your loved one yet you are stuck with some other financial problems that you created as a result of lending to someone else.
Consider the possible consequences
Lending to friends or family involves more than just a sum of money. It involves commitment, emotion, and trust. The National Foundation for Credit Counseling (NFCC) does encourage the lender to be aware of the possible consequences of lending money to family and friends.
Make sure that you are fully vested in the scenario and fully understood both the positive and negative outcomes of lending money to loved ones.
As I said earlier, you need to be aware the so many “what ifs” that could happen when you let loved ones borrow money from you.
Avoid micromanaging the borrower just because you loaned him/her some money. Divorce yourself from doing that and focus more on getting repaid. Your job is not a micromanager but a lender.
If you do micromanage the borrower, be ready for the possibility to harboring negative feelings such as conflict and disagreement.
My mom used to say that why I should I to others what I don't want others to do to me. For example, if I don't like being micromanaged, then, why should I micromanage those people who borrow money from you.
Lending your hard-earned money to your loved ones is a challenge.
But before you let people borrow money from you, make sure that you have considered all the factors and know what you are getting into. This way, in the end, you won't regret what you did or didn't do in this kind of lending situation.
Has someone borrowed money from you? What steps do you take to make sure you get your money back?