Loaning money to friends or family is one of those situations where things can quickly get complicated, and while helping out a loved one in need is a kind and generous gesture, it’s important to approach the situation with clear boundaries. Here are the essential rules you should never break when loaning money to those close to you.
Set Clear Expectations from the Start
It’s crucial to be upfront about the terms of the loan before any money changes hands, so have a candid conversation about when and how the money will be repaid. Will there be a repayment plan with deadlines, or is this a one-time lump sum repayment? Clarify everything, including any interest (if applicable), so there are no surprises later on.
Consider Offering a Gift Instead
If the person asking for the loan is in a tough spot, and you can afford it, consider offering the money as a gift instead. This approach can relieve both parties of the stress associated with repayment and avoid potential friction if they struggle to pay you back.
Don’t Feel Obligated to Say Yes
Just because someone asks doesn’t mean you have to agree to loan them money; it’s okay to say no, especially if you’re uncomfortable or if lending the money would put your own finances at risk. Remember, your well-being matters too, and it’s not selfish to protect it.
Don’t Lend More Than You Can Afford
“Only lend what you can afford to lose,” advises Experian, and when you lend money to friends or family, there’s always a chance you might not get it back, as even with the best intentions, things don’t always go as planned. Before agreeing to help, make sure you’re only lending an amount you can live without.
Avoid Being Secretive
If you’re in a relationship or share finances with someone else, it’s important to be open about the loan with them, because secretly loaning money can lead to trust issues and tension, especially if your partner finds out later. Discuss the request with them before making a decision, ensuring you’re both on the same page.
Keep It Professional
Even though you’re dealing with a friend or family member, treat the loan as a business transaction, and this means being clear, documenting everything, and sticking to the agreed terms. It’s easy to let things slide with loved ones, but doing so can lead to resentment.
Don’t Chase Them Down for Repayment
If the person you loaned money to is late on a payment, resist the urge to chase them down aggressively. A gentle reminder is okay, but constant pressure can strain the relationship, so instead, have an open conversation about why they’re struggling to repay and work together to find a solution.
Understand Their Financial Situation
Before agreeing to lend money, take the time to understand the person’s financial situation. If they are facing temporary hardship, or have a history of poor financial management, a loan might not solve their problems and could lead to further issues down the road.
Don’t Expect Favouritism in Return
Loaning money to friends or family should never come with strings attached, so don’t expect special treatment, favours, or future preferential behaviour because you helped them out. This mindset can lead to disappointment and hurt feelings if they don’t meet your expectations.
Be Prepared for Possible Relationship Strain
Even with the best intentions and clear agreements, lending money can sometimes strain relationships, due to the fact that if the loan isn’t repaid or if the borrower feels uncomfortable around you afterwards, it could affect your relationship. Be aware of this possibility and be ready to address any issues that arise.
Be Mindful of Family Dynamics
When sharing money with family members, consider how it might affect the broader family dynamic. Will other family members feel left out or expect the same treatment? Be aware of these potential ripple effects and decide if the loan is worth the possible complications.
Don’t Be Afraid to Set Boundaries
It’s essential to set boundaries when loaning money, therefore if you feel uncomfortable or if the loan request is too large, don’t hesitate to say no. You can also set boundaries on the amount you’re willing to lend or the repayment terms.
Offer Non-Financial Help
If you’re not comfortable giving out money, or if you can’t afford it, consider offering non-financial help instead; this could include helping them find a job, creating a budget, or offering emotional support during a tough time. Non-financial assistance can sometimes be more valuable and long-lasting than a financial loan.
Avoid Frequent Lending
It might be a sign of deeper financial issues if a friend or family member frequently asks for loans, so in such cases, it’s better to have an honest conversation about their situation rather than continuing to lend them money. Repeated loans can create a cycle of dependency and prevent them from addressing the root cause of their financial problems.
Make Sure It’s Truly Helping
Before agreeing to lend money, consider whether it will truly help the person or if it might just be a temporary fix. Sometimes, giving money can enable poor financial habits or delay them from making necessary changes, so think carefully about whether the loan will genuinely benefit them in the long run.
Be Cautious of Co-Signing
Co-signing a loan for a friend or family member can be even riskier than lending money directly, because if they default on the loan, you’ll be responsible for the payments, which can severely impact your credit and financial health. Before agreeing to co-sign, consider the risks carefully and be prepared for the possibility that you might end up paying off the loan yourself.
Keep Your Emotions in Check
Lending money to loved ones can be an emotional decision, but it’s important to keep your emotions in check, and that means not letting guilt, pressure, or fear of damaging the relationship cloud your judgement. Make sure your decision is based on your financial reality and what you’re comfortable with.
Consider a Written Agreement
Even if you trust the person completely, consider drawing up a simple written agreement outlining the loan terms. This doesn’t have to be a formal contract, but a written record can prevent misunderstandings and ensure that both parties are clear about the expectations—not to mention it can also serve as a helpful reminder if either party forgets the terms later on.
Think Long-Term
Before giving out money, think about the long-term implications for your relationship, because if the loan isn’t repaid, or if the person feels embarrassed or guilty about not being able to repay, it could affect your relationship for years to come. Weigh the potential long-term consequences before making your decision.
Stay Honest and Direct
Honesty is crucial when loaning money to friends or family, so be direct about your ability to lend, the terms, and any concerns you might have. Likewise, encourage the borrower to be honest about their situation and their ability to repay.
Know When to Let It Go
Sometimes, despite your best efforts, the loan might not be repaid. If this happens, it’s important to know when to let it go, because holding onto resentment or constantly reminding the borrower of their debt can damage your relationship, so it might be best to write off the loan and move on.
