It is difficult to turn down a family member or friend when they are in need of some financial help. Unless they are asking for an unaffordable advance, most times you will be tempted to loan them the money they need. Instead of seeking financing from a traditional lender such as a bank, your friends and family could find better value accessing financial help from you.
Even though these loans can be of great help, they might cause adversity and tension that could affect even the strongest bonds. Unresolved debt is a major reason why many people are estranged from their families or friends. If things fail to go according to plan, which is very likely for unofficial financial aid, you could lose a family member or close friend.
So how can you ensure you protect both your finances and your relationships with those around you?
Make the agreement official
In order to avoid any conflict between yourself and those around you as a result of financial disputes, you should consider setting specific terms to which they need to agree to before taking the loan. Even if you are not charging any interest, it is crucial that you discuss in great detail other factors surrounding the loan. You need to agree on the amount to lend out, a viable repayment strategy and other perks that may arise from it. Your borrower should understand and agree to these terms before they take up the loan, failure to which they should seek alternative financing options.
Your loan agreement needs to be legally binding, which means that you should have it documented. You may even consider a public notary in the event that this loan features a significant value. Both the borrower and lender must agree to and sign the relevant documents to ensure the specific terms of the agreement can be legally enforced. You may even consider having a lawyer draw up your contract to suit the needs of both parties. With a legally binding loan agreement, there is little room for dispute between you.
Don’t expect to get paid back
Small personal loans, especially the unofficial kind, have low repayment rates. Even if you are loaning money to a financially stable and trustworthy friend, they may experience circumstances that make them unable to pay their loan. If they have other financial duties that require more urgency than your agreement, they could be delayed or even be unable to make their payments. For instance, your relative would prioritize a mortgage repayment over your loan since losing their home investment could be more expensive than facing a minor disagreement. You should not plan for this money until your borrower actually makes the repayment. You may be able to improve your ability to do this by only lending money that you can actually afford to lose.
You do not have to lose a family member or friend just because of a bad loan. If you do not believe they will pay you back and are in a position to offer help, you may consider gifting them as opposed to going into a loan agreement. In the event that you do, it is important to write up a loan document that will provide accountability.
For U.S. News, Mr. Bell writes about stocks, marijuana stocks, cryptocurrency, personal finance, energy and cybersecurity. Mr. Chang is a graduate of Purdue University and resides in Texas.