Credit is getting more difficult to obtain, so don’t be surprised if a friend or family member springs that frightful question: “Can I borrow some money?” Although borrowing money is usually done with the intention of paying the lender back, this does not always happen. Lending money to friends and family can put you in the unfortunate situation of being left without your money and possibly your relationship.
Before agreeing to lend money to your friends, openly communicate to them your concerns and expectations. Remember, you should only lend money you feel confidant will be paid back.
Don’t test your own financial limits
Only agree to loan money that you can afford to lend. List all necessary living expenses and make sure those items have been paid prior to agreeing to lend money. You don’t want to find yourself in the same situation as your friend who needed to borrow money from you.
Put the loan agreement in writing
If you choose to lend someone money, treat the personal loan like you would any other business matter. Discuss the terms of the agreement and put the details in writing. Be sure to list both parties involved, the interest rate, due dates, payment amounts, and penalty for late or missed payments. Don’t feel bad asking to formalize the agreement – it may help protect your friendship later. If your friend doesn’t want to put everything in writing, then don’t agree to lend the money.
Know your place
Once you’ve lent the money, do not assume a position of power by expecting special treatment from the borrower. Also, once the money has been lent, don’t try to control how it is spent. Being too authoritative could damage your friendship.
Prepare for the worst before agreeing to lend money to a friend or a family member
Make sure you are comfortable with attempting to collect on the debt if necessary. Document the date and time of any letters or phone calls, and make sure you make note of all the responses to your attempts. Your records may be necessary if you plan to take the matter to court, or if you plan to write the debt off as non-business bad debt on your next tax return.
If you still aren’t sure whether or not you should extend a loan, remember this famous quote from Shakespeare: “Neither a borrower nor a lender be; for loan oft loses both itself and friend.”