Lending money to friends and family can be a delicate and challenging decision. We have heard of numerous cases where this has wrecked well-meaning relationships.
“But how do I go about it without losing either a friend or my money?” You might ask
While it is natural to want to help your loved ones during a financial crisis, it is equally important to ensure that the process is carefully planned to avoid any regrets or damaged relationships.
In this article, we will walk you through some practical steps on how you can lend money to your friends and family without regretting it.
But the first thing you want to do is have honest conversations with yourself. In doing this, you should:
- Assess your financial situation
- Consider the impact on your relationship
- Have selective approach
1. Assess your financial situation
Before you decide to lend money to a friend or family member, take a close look at your financial situation. Ensure that you’re in a position to lend money without putting at risk your own financial stability.
Some questions you should ask yourself are:
- Can I afford to lend this money without affecting my own financial goal?
- Will lending this money strain our relationship?
- Am I prepared to accept that I might not get the money back?
It is crucial that you are very honest with yourself when assessing your financial situation as it is the first step to prevent regrets in the future.
If you don’t have a financial goal, you should create a savings plan and save nonetheless. If not, anyone can just come and borrow it since you don’t have a plan for it.
2. Consider the impact on your relationship
If not done properly, lending money to close friends and family members can damage relationships. Think about how it might affect your interaction with the borrower and other family members.
Some questions you should ask yourself include:
- How will this loved one react if they have difficulty repaying the loan?
- Can I emotionally handle the possibility of not getting my money back?
- Will lending this money cause resentment or tension within the family or friend group?
Understanding the potential impact it can have on your relationship will guide you in making an informed decision on whether you should lend and how much.
3. Have a selective approach
While you may want to help all your friends and family members in need, it’s essential to be selective about who you lend money to.
Assess the borrower’s financial responsibility, history of repaying debts, and their commitment to the agreed-upon terms. Avoid lending money to those who have a pattern of financial irresponsibility, as it may lead to regrets and strained relationships.
Once all this is sorted within you and you find out you can lend money to this loved one, you should:
Communicate openly
When lending money to friends and family, clear and honest communication is key.
You should discuss:
- The purpose of the loan
- The repayment plan
- Terms and conditions
Set boundaries
When lending money to your loved ones, set clear boundaries determining what you’re comfortable with, and stick to those boundaries.
For example, decide whether you’re willing to charge interest on the loan or if you will consider alternative forms of repayment, which could be in the form of labour or services. Setting boundaries can help protect both your money and your relationship.
Create a written agreement
This might feel awkward but it is a crucial step in lending money to friends and family especially if the amount is a huge sum. This document should contain all the terms and conditions of the loan including the amount they want to borrow from you, the repayment schedule, consequences for late or missed payments, then the interest rate and collateral if applicable.
Having a written agreement can help prevent misunderstandings and protect both parties’ interests.
Offer alternative forms of help
In some cases, offering alternative forms of support might be more appropriate instead of lending money directly. For instance, you could help them create a budget, search for a job, or explore other means that could eventually solve the issue rather than outright monetary loans. This can be a more sustainable and regret-free solution.
Be patient and flexible
When lending money to friends and family, it’s important to be patient and flexible. Life can be unpredictable, and unexpected financial challenges may arise for the loved one you lent money to. If they have trouble paying back the loan, try to devise a solution together that considers their situation while preserving your financial interests.
Bottom line
Lending money to friends and family can be a generous and compassionate act, but it comes with its own set of challenges. While it’s important to trust your friends and family, you should also be ready in case they are unable to repay the loan as planned. The ability to repay a loan might be impacted by unforeseen situations because life is unpredictable.
With careful consideration, you can lend money to loved ones without regret and maintain strong, healthy relationships. However, when you finally decide to lend your money, also be mentally ready for the worst-case situation: you might not get your money back.
Don’t fall into the trap of always lending money to people while you hardly have savings yourself. Start building emergency savings for yourself today. 👇🏼👇🏽👇🏾👇🏿
Start your journey to financial security.
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