At some point in your life, you will likely be asked to provide a loan to a family member or friend. It can be a tough decision to make. Often, you want to help out those to whom you are close, but it comes with risk. Not only can you ultimately lose the money, you can cause irreparable harm to the relationship. Before you choose the best option for your situation, consider the following points.
Can You Afford to Help Your Family Member or Friend?
Our instincts tell us to do everything we can for family and friends. However, you need to decide if you can actually afford to be without the funds. You will have a short-term loss as soon as the money is lent. You also might not be paid back.
Part of your decision needs to focus on what you can and can’t afford to be without. If you have spare money that you don’t need immediately (or ever), then it may be okay to lend. If being without it causes undue harm, then you should decline.
Does Everyone Agree?
For single people, the decision is yours alone. But, if you are in a couple, then this should be discussed. Not only will the household’s money be at risk, but the damage to the relationships will be felt by you both should things turn sour. Granted, a small loan of £20 might not break the bank. Therefore, discussion might be unnecessary. However, if a large amount of money (especially if it is from a joint account) is going to be involved, everyone should be onboard before the money is lent.
Will All Parties Involved Sign an Agreement?
If it is truly a loan, then paperwork is in order. Take time to spell out the details, including the amount lent, any interest charges, as well as a payment schedule. You can also include penalties for missed payments or default.
By making it formal, you know everyone understands the situation as it is. While terms can be negotiated before finalizing the agreement, the final copy must be mutually acceptable. If either party disagrees with the terms, or one party won’t bend, then the loan shouldn’t happen.
Are There Alternatives?
Just because they are asking for money that doesn’t mean money is the only solution. For example, if someone needs help getting groceries, you can take them to the store and purchase some food. Or, if a bill is past due, you can pay it directly instead of handing over cash. Sometimes, this makes the situation simpler as you have more control over what actually happens with the funds. Plus, you may be able to identify a more cost-effective solution to the problem than the borrower originally realized.
Beware of choosing to co-sign a bank loan instead of lending the funds yourself. If you primary borrower defaults, you are on the hook. Your credit rating may also suffer.
Can it be a Gift?
Sometimes, avoiding the idea of a loan is the best option. Consider if you can afford to never get the money back. If you can, then making it a gift may preserve the relationship. You can tie the gift to an event, such as a birthday, wedding, or graduation. That way, there is no burden left between family or friends. Instead, you got them the exact gift they needed, when they needed it.