5 tips to lend money to your friends and relatives

When your friends or relatives ask for money, you must first consider why they ask you and not someone else. They are likely to imagine that your business is generating huge profits or perhaps because you have just bought a new house or car. What they see is your line of credit or how little is actually your profit margin. Become consignee of a loan to relatives or friends may sound like a better idea to give loan directly, however, this may end up even worse if something goes wrong. As consignee, you are legally obligated to debt. If the debtor did not pay back or leave the city, you’ll be with all payments, with a negative mark on your record and a friendship apart. Yet this has not stopped many entrepreneurs to learn the hard way that family/relatives, friendship and finances should not be mixed.

Once a couple who borrowed $20,000 from a relative. Supposedly, the money was intended to pay a mortgage but instead used it to buy iPhone and cosmetic surgery for the wife. Never paid the loan. Clearly, not all loans to family and friends will end in disaster, but the potential problem is that you should think twice before saying yes. To save you from this kind of situation, you should consider beforehand how you will handle any possible problems; ask yourself what would happen if the loan is not paid. How would it affect your finances and your relationship? Some people just decide never to give personal loans. If you ask why, they respond “Sorry, but it’s my policy never to lend money.” But if you’re thinking to lend money to a friend or family member or relative, is important to take these rules into account:

1. Discuss other options: Are there any other ways that you can help? Money is not always the only solution.

2. Pay only the amount you can lose: I just mean that you lend money to your relatives and friends, you can assume that you will not get it back, so it is essential to never put your financial status at risk.

3. Be clear about your expectations: Make payment plan with detailed timetable and deadlines. Discuss with the person who borrows the money.  Ask him/her that what happens if something goes wrong or if you can not pay in a timely manner?

4. Put it in writing: While lending money among relatives and friends, we probably prefer not to hire a lawyer, it is important to have some kind of legal commitment or at least supported documents.

5. Take care of problems: when you may feel you are being generous by not sending a reminder if there is a delay in pay bay back, make sure that you are asking for trouble yourself.

Let him know that you monitor the debtor payments and you’re on the lookout for the commitments. If you can afford (and it seems appropriate) consider giving money away. In this way, there will be no discomfort on either side. If they pay back, then well and good, and if not, you can feel good about helping someone.