Should you lend money to family and friends?

There are many occasions when your friend or brother seeks financial assistance from you. While there are financial institutions to lend money, they prefer to borrow from you for one reason and another. It becomes quite hard to refuse them. If your best friend approaches you, of course, you would not be able to refuse them and if your relative seeks financial help. You do not want to sound stingy.

There is nothing wrong with providing financial assistance to someone whom you know or who is so close to you, but many people have reported that they regretted lending money to family and friends. There are many scenarios in which people have reported that they struggled a lot to receive their money back from them. Contrary to fulfilling their promises, they backed out. Since there was no written agreement, it was all but impossible to recover money from them.

Why is it risky to lend money to friends and family?

First off, there is no formality between you and your friends and family, and therefore, when they need money, you emphasise verbal words rather than written contracts. You expect them to be people of their word. Unfortunately, many people regret that they believed their apocryphal promises.

Their friends and family members did not bother to return their money. There is no gainsaying that the risk involved in lending them money is too high. Since there is no written contract, you would never be able to enforce them.

If you are looking to lend money to your close friends, you should ensure that they will pay your money back. You should clear all terms and conditions in advance, such as the repayment period, beforehand, so there is no confusion left between your friends and you.

You might have a good relationship with that person, and chances are you are not in a position to refuse. As long as your budget has room to meet your essential expenses, you should never mind lending money. But if you are already suffering from indebtedness, you should avoid lending money to them even if you have very good relationships with them.

For instance, if you have small emergency loans like door to door loans in the UK or credit card debt, you should always prioritise the settlement of your outstanding debt. It does not mean to discourage you from helping them, but it does not sound logical and wise to lend them money when you are already struggling with money.

What should you do while lending money to your friends and family?

If you are to lend money to your friends and family, make sure that there is an enforceable agreement between both parties so nobody does an about-turn. Do the right things so nobody can take advantage of your generosity.

Accept the reality

If you want to act so generously, make sure that you are lending what you can afford to lose. It is likely that they need a large amount of money, such as £1,000, but you should not give this much money because there are chances that they will never pay you back. This is one of the reasons why they are borrowing from you and not going to credit unions, banks and direct lenders.

A small amount of money as a gift could be more than enough because you would not suffer financially if they did not pay you back. Not all friends and relatives are nice to return the favour. When money comes in, people do not respect others’ emotions and feelings.

Charge a reasonable interest rate

If you have decided to lend money, you should not do it as charity. Bear in mind that your money loses its value due to inflation. Therefore, it is vital to charge some interest. If you do not charge interest, your money will lose its value over time. As a result, your buying power will reduce. Therefore, it is suggested that you charge a reasonable interest rate.

You do not have to charge as high interest as direct lenders do. For instance, if you take out no guarantor loans within 24 hours, lenders will charge high interest rates. Their interest rates also include fees and associated charges. Therefore, they are very expensive. You do not need to charge those high interest rates because you are not a professional and registered lender. You should rather charge a nominal interest rate to protect your buying power.

You should discuss the interest rate with them beforehand and make sure that they have consented to it. They might negotiate it.

Write an agreement

They would most likely have a verbal agreement, but that is not effective, especially if they make an about-face. If you do not have it in writing, you will not be able to compel them to pay your money back. Any agreement between two parties should be enforceable. Your chances of making them adhere to payments are high when you have a written agreement.

Mention all terms and conditions in the agreement. Nothing should be left, so you do not face any difficulty getting your money back from your customers. Be clear, and do not use ambiguous terms. The repayment term should also be mentioned in your agreement. Discuss it with your friends and family to ensure they are comfortable with it.

Require collateral

If you are lending a large amount of money, you should always ask them to secure the loan. If they put down collateral, it will minimise your risk. They will be compelled to pay you back money on time, fearing the risk of losing their assets. However, you must have an agreement disclosing the condition for the repossession of their valuable assets.

The final word

There is nothing wrong with lending money to your family and friends as long as you are certain that you will receive your money back on time. Because there is always a risk of default, you should have a formal agreement. Otherwise, lend them money that you can afford to lose.