We are in some tough and trying financial times and if you are working or financially stable, friends and family may have approached you for a loan.
It’s wonderful to be able to help financially challenged friends or family members, but lending money has a way of resulting in arguments, disagreements, and hurt feelings. Many financial experts recommend never lending money to loved ones. But every situation is different especially in times of economic downturns like an economic recession. It’s important to consider all the issues and then make your best decision. Remember research has shown that 45% of people that make personal loans aren’t paid back entirely. And 25% never get paid back at all! Understand that the likelihood of getting paid back isn’t great.
If you’ve decided to make a loan, taking these steps will help ensure things go smoothly:
- Make it a gift! Consider making the loan a gift without any expectation of being paid back, there’s less opportunity for the relationship to be harmed.
- Be sure you can afford it. It doesn’t make sense to create financial challenges for yourself.
- Consider creating a promissory note. This document will make the loan feel more formal, and your friend or family member is more likely to take it seriously. In the event that you need to take action to get your money back, having some paperwork is bound to help.
- Be clear about your expectations. If you make it clear that you’re happy to help, but it’s also important that you’re repaid, your borrower will have a better understanding of the need to be responsible. Be honest and open about the importance of being paid back.
- If you can’t afford to lose the money, do not lend any money!
- Charge some interest. This might seem a little unkind, but charging interest has multiple benefits. It lets the borrower know that you’re serious. It also avoids any potential gift tax by making it clear that it’s actually a loan. The IRS has interest guidelines for family loans. Be sure to check them out.
- Consider what you’ll do if you don’t get paid back. What will you do? How will you feel? The answers to those questions might change your mind about making the loan. Are you willing to just let it go? Are you going to take them to court?
- It might be best to just say “no.” In some instances, refusing to make the loan might be the wisest option for everyone involved. If you really need to be paid back in full and you believe the borrower won’t honor the agreement, it might be better to disappoint them instead of putting yourself into a financial bind.
Lending money to friends and family is a kind gesture but full of potential pitfalls. Personal loans aren’t reliable. If you decide to make a loan, communication is critical. Ensure that everyone understands the details for the best experience for all involved.
Love, Dr. Randi