Some people say you should never loan money to a friend or family member. Money tends to complicate relationships, particularly if the borrower doesn’t pay you back as agreed. It’s easy to set a rule that you'll never loan money to people you know, but it’s just as hard to watch someone close to you suffer financially, especially if you can help. If you decide to loan money to a friend or family member, here are some tips to make the process smoother.
Keep in mind that the person needs to borrow from you because they don't have access to a credit card or traditional bank loan. Knowing that this person is a risky borrower even for banks means you should proceed with caution.
Make sure you can afford it. Don’t put yourself in a financial bind to loan money to someone else. Understand upfront there's a risk that you won’t get your money back. Make sure that won't create a difficult situation for you.
Come up with a mutually agreed payment schedule. Don’t assume your loved one will pay you back automatically. Work out a repayment plan based on what the borrower can afford to pay and how soon you want to be repaid. What are you going to do if the borrower falls behind on the repayment schedule? Decide these details upfront to prevent a disagreement if the worst happens.
Set up automatic payments. If the borrower is serious about paying you back, they shouldn’t have a problem with setting up a recurring payment from their bank to yours based on the repayment schedule you’ve worked out.
Don’t let negative feelings fester. Because of your closeness, you know more about your friend’s spending habits. So, you might see them spend $200 at the mall even though they will owe you $400. Before loaning the money, you acknowledged there was a certain amount of risk involved. If you're upset because you’re not being repaid quickly enough, it’s better to discuss it than to let your feelings fester and grow into full blown resentment.
Think of it a gift rather than a loan. Adjusting your expectations of getting repaid can keep away hard feelings about late payments or non-payment. If your friend pays back the loan, good. But, if not, you’re less likely to have hard feelings about it.
It’s ok to say no, for example, if you can’t afford it, you have a policy of not loaning money to friends or family members, or you feel like loaning money is just enabling your loved one’s bad spending habits. Not loaning money could save your relationship and your own finances.