Too many relationships have been torn asunder over money. As a result, lots of people have personal rules about lending money to family and friends in order to avoid the heartache and turmoil that can come with the transaction. The most common rule: “I don’t lend money to family or friends.”
But what is a friend or family member for if not to lend a helping hand to a loved one in need? In these tough economic times especially, when some are struggling to find a job, living week to week, or trying to pay down debt that may have accumulated during a rough patch, having someone to call on can be a godsend.
U.S. News & World Report lists some of its tips for loaning money to friends and family that is focused on a big amount changing hands, such as the down payment for a house. “Family and friends will often provide loans at a lower interest rate than banks, and the deal enables borrowers to avoid additional fees tacked on by traditional lenders,” the story says.
If you’ve got a friend or family member that can lend that kind of money, good on you. The people looking for a few hundred bucks or less, however, is probably the bigger proportion of the family/friend loaning that’s going on.
These cases should be treated much the same way: have clearly defined rules for when this money is going to be paid back and put it in writing if possible.
And communicate. Oftentimes, it’s not the money that causes issues. It’s a miscommunication that makes the person doing the lending feel like they’re being take advantage of. Or the person who has asked feels terrible about being in need and would prefer not to talk about the loan any more than they have to. Lay everything out in one comprehensive conversation where you talk about the terms of the loan and what each person expects.
And that’s where the explaining should end. Once you make a loan, it’s not your job to become that person’s financial manager. You lay out the terms, come to an agreement, and then wait to get your money back at the appointed time. The person taking the loan should adhere to what you’ve discussed. But giving a loan doesn’t mean you were invited into that person’s wallet.
Finally, if you’re the one doing the loaning, let this be your mantra: Don’t lend money that you can’t afford to lose. There’s always the possibility that the person who’s getting the money can’t get it back to you at the time they promised, if at all. Maybe they fall into even more dire straits; maybe they’re just irresponsible. If you’re giving someone your rent money or mortgage payment, you’re asking for trouble. If you can’t do it, you simply can’t.