“I’m in debt. I am a true American.” – Balki Bartokomous.
The question, “why should not we lend our hard earned money to family and friends?” the reason for t his question is very simple.
“Unpaid loan can loss both money and friendship.”
In other words, a loan granted with your friend or any member of the family often results to loss of money and relationship. And this is in fact proven and tested thru the years with many people who have been granting loans to the people close to them.
In reality, loans created that involve members of the family or even friends can cause unexpected series of problems in the future.
So, if you have friends or family members asking for loan, why not consider these helpful reasons for you to know before you lend money to them.
Why is a “NO” to lend money to your friends and family?
I lent money to family and friends and it seems the situation worked out well with no problems. If that is the situation, good for you but things are not like that all the time. Money is money, everyone needs it.
Borrowing money is not that easy now you know. Lending organization in the society has become strict due to economic crisis, so people now are turning to other option to borrow money for them to solve their financial difficulties temporarily.
Does any of your family member or friend notify you for a possible personal loan?
Check this out, 6% of first time property buyers in the market received funds thru loan from a friend or someone close to them, so they can purchase their dream property like dream house.
Another thing, business owners borrows money from friend and relatives for them to start the operation going. In short, the fastest way to get cash is borrowing it to the one close to you heart, since you are sure your request will be granted without any needed long list of requirements submitted before you’re loan will be approved.
From the statement above you will be tempted now to check your friend list who borrows from you and check if they are still qualified for your trust.
But the good thing is that, you can prevent bumpy situations from happening regarding loan repayments if you handle things properly.
We learned lot of experiences both good and bad, and with those experiences we suggest if possible “do not loan any of your friend or member of the family”, we will be saying this all over again, for whatever reasons, we will enumerate them one by one here.
So if you decide to lend money to someone close to your heart, read some of our tips that will help you lessen potential breakdowns in the future.
1. Loan with open-ended terms
Loans thru friends and family are open-ended.
Meaning, both parties have no specific agreement or timeframe for the repayments of the loan, and even no interest imposed for the money borrowed.
Most lenders don’t have idea to when their money will be paid back, at the same time borrowers don’t know when to pay its loan.
The scenario becomes a limbo in both borrower and lender, since no expectation has been set. Doubt on both sides creates stress as borrower worries on the expectation of the lender (which was his or her friend or member of the family) on the payment. On the other hand the lender also worries when the loan will be paid.
In order to lessen uncertainty, for the reason that you need to lend money to your friend or a member of your family, give them timeline and specific schedule for them to repay the money they borrowed.
This will give them concrete idea on the final deadline stated for the total repayment of their loan. You can also set regular payment for them to follow, so they will not have difficulties in paying it in a single repayment.
“Mike, I am happy to lend you my money, but I will need it by November 21st. I would like to request a monthly payment for $100 so it will be paid off before November.”
2. Paying loan to friend and family member are not priority
Since it is an open ended type of loan, most borrowers will not realize the sense of pressure for them to repay the borrowed money from a friend. With the absence of repayment deadline, this will become the last priority of the borrower.
The idea is “there is no consequence if they miss to pay the loan granted by a person close to them”, this includes penalties, high interest, late payments, or negative impact to their credit score.
Because of the absence of these penalties, the motivation of the borrower to repay the loan will not be the first priority.
You can talk directly to your friend or family member who borrowed money from you, inform her or him about the repayment schedules for them to set priority.
It is way better for you as lender to set deadlines for them to repay in order to avoid misunderstanding in the future.
3. Difficulty in asking for Repayment
Honestly, it is difficult to ask your friend and any of the family members to get your money back. This is in fact, proven and tested. Requesting repayment will be at pain.
This is because you as the lender of the money value and want to protect your friend or family the borrower from any problem, and you don’t want to make them feel awkward.
As the lender worries on the loan repayment this may result to lesser and even shut down communications with the borrower in order to keep away from the loan issue. This may result to the borrower to get confused and get hurt emotionally.
If it happens that you already lent the money to someone close to your heart and fighting how to ask for repayment, why not talk to the borrower for both of you to resolve the issue.
During the time I lend money to a friend and have difficulty in repayment, I talk to the borrower and offer friendly reminder about the loan. Be constructive in talking to the person, “discussion with less threatening topics”.
4. Loan to Friend and Family can make them Awkward during Gatherings
Let us take two scenarios “I loan money to a friend and I borrowed money from another friend”, during get together things may feel awkward.
Normally, the borrower which was your friend or relative will become uncomfortable being with the person whom they borrowed money.
And another thing was that, being with others who knew about the loan that the person has borrowed something has the same situation.
No one likes to talk about money or anything involved it, because people might wonder why someone has not repaid a loan.
The best way is to have a private agreement regarding the loan. So involve party will not have a bumpy feeling during gatherings, but in situations like gatherings become awkward, stay lighthearted and maneuver discussion away related to money matters.
5. Borrower becomes a Servant
During the situation that I borrowed money from a friend, I felt like I had to please every suggestion asked by my lender, the feeling that you cannot oppose a command, the loss of freedom.
Try not to let your borrower think that he is now a servant (see the featured picture), and don’t let him feel that way. If you feel that your borrower feels under enemy control, you can help him or her ease the discomfort inside.
6. Possibility of your Borrower to ask more
Once you lend money to your friend or a family member, the person involved may return and borrow again, but this time they might ask for more.
“Go to lender” don’t let your circle of friends and family feels this, so set limitations and don’t become a constant lending.
7. Instead of help, you Enable Solution
When you let your friends or any members of the family borrow money from you, you are opening an opportunity for them to get easy way out in terms of financial crisis, so instead of just helping with their financial needs work through it.
Your friend ask for money to pay her card bill, but the problem is on budgeting and he needs help in doing it. In this situation as lender, refuse but instead, offer help for him to create budget plan or look alternative income to solve the issue.
You can do mentoring by offering advices and tips for them to improve financial management and increase their understanding on cash flow in order to help them solve their problem in the long run, not by just looking for window for them to solve problem temporarily.
8. Loan with no Interest
Though not all, but most people who lend money to friend is free of charge of fees and interest.
If it happens that interest imposed it will be minimal, why would you charge interest to your love one? This is the reality. If you invested your money to some organization you might received interest.
Though charging interest may feel awkward with your friends and family, doing this is totally fine and it is not unreasonable. Offer privileges like lower interest rate compared to traditional bank and loan sharks.
9. Money at need
Your money needs to be returned, not just you borrower need the money, the funds you lend to someone was also set for something you plan.
- What if suddenly you lose your employment and no income?
- What if you used up your emergency fund while looking for another job?
- What if you need to buy food for your family?
- What if you need to pay your obligations in order to keep your house asset from possible foreclosure?
By not receiving any repayment may result to disaster in your part.
If you have feeling that you might lose something, or other money related factor in the future, try to be yourself and don’t release money to both friends and family members.
Tell the truth and it will set you free, tell them that you are on the same boat and you are preparing for something to protect upcoming financial crisis.
10. Possibility of losing both money and relationship
As we stated on our introductory part, “For loan oft loses both itself and friend.” So it is just a reminder before lending money to a person close to you.
Beware that doing it may endanger your funds of not getting it back and for worst situation it can damage good relationship that will never heal. It can even case to tension between parties that can result to anger, guilt and remorse.
“Higher risk of relationship damage”, this issue should be discussed before letting your friend or family member borrow money from you. Discuss matters on how to preserve relationship and ensure things like that will not happen.
As possible “don’t do it”, look the possibilities and steer at it. The possibilities of broken long time relationship due to unpaid loans you have granted. If you can turn down loan request, do it.
For some reason that help is really at need, you will have to set clear ground rules so the privilege you have given will not be taken advantage. You can design agreements that will track regular repayment of the given loan.
Don’t just lend away money, this even leave you in financial crisis in the future.
Secure yourself first, there’s no point of securing other people and in the first hand you have financial difficulties to face in the end. You can assess everything and figure out properly if you have extra cash or your already overdraft.
Designing specific agreement on loan repayments plays a crucial role, outline loan terms approved both party.
Don’t forget to include the borrowed amount, and the repayment term and if there are interest and penalty imposed how much it would be (this only implies if you decide to charge interest).
To the best interest of both parties, indicate the name and signature and include third party witness, it is way good to notarize the loan document in order to be secure.
If possible charge interest (but this is case to case basis, when dealing with people close to you), this is a good idea but the decision is always with the borrower. And prepare for the worst scenario that would happen to your money.
Higher possibility that you will not get your money back when you lend them to people that is close to you. This is not hearsay, but this is reality.
Most borrowers will treat the given loan privilege as gifts.
So as lender prepare yourself for scenarios like “you will not get your lend money back”. So that is why we said that you need to secure yourself first, be sure that you are lending extra money not money set for food or for regular expenses.
If things like this happen in the long run, it can destroy your kindness. Gentle reminders will work, if not you can sue your friend to court.
You are helping people close to you, we know you want it. But there are certain situations to be applied in order for them to realize the value that you have given to them. You certainly want your close friend or even member of the family care for you.
Again never lend them money if your goal is to help.
You can simply refuse to give loan, you can determine best ways to help them, not by just doing the easy way, doing it will also help them realize the importance of money so they become aware in the future.
There are situation that you need to let people close to your heart realized that there are things that they should do whether it is against their will.
These situations might make them mad or angry at you. As long as possible suggest things that will not jeopardize relationship and friendship in the future.
If lending them the money to your friend or member of the family is the best solution, talk heart to heart and open honest conversation and discuss possible problems it may happen during the loan. Discuss issues on how to resolve repayment issues as frank as possible in the open discussion. (Guest Post)
Table of Contents
- 1 Why is a “NO” to lend money to your friends and family?
- 2 1. Loan with open-ended terms
- 3 2. Paying loan to friend and family member are not priority
- 4 3. Difficulty in asking for Repayment
- 5 4. Loan to Friend and Family can make them Awkward during Gatherings
- 6 5. Borrower becomes a Servant
- 7 6. Possibility of your Borrower to ask more
- 8 7. Instead of help, you Enable Solution
- 9 8. Loan with no Interest
- 10 9. Money at need
- 11 10. Possibility of losing both money and relationship
- 12 Bonus tips: