When you lend money to friends or family members in good faith, it can be difficult to guarantee repayment. Not only does it create financial pressure, but it can also have an impact on your relationships. No matter how well prepared you are for the situation, there is always a possibility that the loan terms will not be met.
To avoid unnecessary strain on your relationship, be proactive rather than reactive when lending money to a friend or family member. Start by drafting a contractual agreement before beginning the process and be prepared for alternative repayment options if they are unable to make the payments.
How to best take out your loan with a family member or friend for repayment
If you find yourself in a situation where you are considering lending money to a friend or family member, make sure you are financially sound. Review all possible scenarios and possible alternatives before handing out cash, taking into account the relationship and financial stress that lending a large amount of money can cause.
Ultimately, you can never be prepared enough to minimize the risk of not getting your money back from a loved one.
Be direct
Being direct applies to your communications before you borrow the money and how you handle the repayment process. If a family member or friend asks you for a large sum of money, make a written agreement that specifies how and when the money will be repaid. Although writing an agreement is not legally binding, like a loan agreement from a lender, it can reduce the risk of not getting your money back.
A conversation with a family member or friend makes the appointment more formal and can increase the severity of the reimbursement process. Most importantly, writing down the loan terms and details ensures that everyone involved is on the same page before the money is distributed.
It’s also a good idea to communicate directly during the payback period. This is where it can be helpful to have a written document to refer to. Try not to be passive-aggressive if a payment is late or missed. If necessary, consult your loan terms, be direct in your expectations and determine consequences, such as interest accrual or costs.
Don’t let too much time pass
Don’t wait too long to mention repayment. Otherwise, the borrower may forget to make the payments or misunderstand your timeline. While you don’t want to constantly pester your loved ones for repayment, you should be clear about your expectations, just like a lender would be. Before you borrow money, make sure both parties fully understand – and agree – when payments will begin.
Be as professional as possible during the process
Combining money and friends can be a risky endeavor, but to minimize relationship risks, try to keep the two separate and treat the process as a business transaction. Consider the potential risk of the person borrowing from you and ask the following questions as part of an application process.
Ask questions as if you were a lender gauging a potential customer’s suitability. Before drawing up an agreement or terms, gather the borrower’s credit score and ask him about his financial history and current debt burden. You may need to reconsider the loan if you cannot say with certainty that you would borrow the money if the other person were a stranger.
You can then suggest alternatives, such as applying for a credit card, a personal loan from a financial institution or using savings. In this case, pulling back before you begin can keep the process as transactional as possible. Remember to keep your relationship experiences out of the picture if that’s what’s best for both of you.
Create a specific payment plan
After gauging the borrower’s financial status and health, create a repayment plan that works for both parties. The written agreement must include the following:
- The repayment term (most loans last three to five years, depending on the balance).
- The total loan amount, including the principal amount and interest rate, if applicable.
- The interest rate and the accrual structure.
- Whether you will charge a late fee and how much it will be.
- Whether the repayment will be weekly, biweekly or monthly.
- The date on which the refund begins.
- How the borrower will pay you back. This includes transferring the money to your account via an app, in cash or by cheque.
What can you do if you cannot get your loved one to repay the loan?
No matter how strong your relationship is, you may still not get your money back within the agreed upon timeline. To avoid adding further strain to your situation, it is best to have a plan in place so you can be prepared for the worst possible scenarios.
Consider alternative payment options
If you’ve raised concerns about missing payments and reviewed your written contract terms with your borrower, it may be time to brainstorm alternative repayment methods. For example, you can rewrite the contract to extend the payment term and make the monthly payments smaller. As a motivator, you can also start accruing interest on the past due balance.
If your friend or family member has fallen on hard times and cannot pay back the balance, consider other forms of reimbursement instead of cash. For example, if you don’t need the money, maybe they can be your babysitter for a night or two, or have a skill you can trade for erasing the debt. While this is clearly not the ideal scenario, it can be better than nothing and prevent future relationship friction.
Forgive the outstanding debt
If all else fails, you may have to choose between your friendship and the money you lent. If discussing loan terms and repayment responsibility hasn’t worked and you’re still out of money, it may be best to forgive the debt to save the relationship.
If you don’t need the money and decide it might be worth canceling the debt altogether, sit down with your friend or family member and fully explain the situation to him or her.
Do you need to lend your friend or family money?
The decision to lend a large sum of money to a friend or family member is not always an easy one. You may be short on time, and sometimes there are as many reasons to say no as there are to say yes. If possible, make sure you have the time you need to make a fully informed decision, but if the situation doesn’t allow that, make sure you keep the following details tucked away.
- The reason for the money: What do they need the money for? You may feel more comfortable lending money to someone if you know why he or she needs it. For example, if they need the money to cover an unexpected trip to the hospital instead of a luxury vacation, that could change the dynamics of the loan.
- Your personal finances: Can you afford to lend them the money they need now? If you do end up borrowing the money, make sure it won’t affect your ability to cover an emergency or unexpected expense. Also make sure that it won’t be too much of a loss if they end up not being able to pay you back.
- The refund timeline: When can they start paying off? Ask your loved one what they can afford and when they will start the process. Indicate whether it is a short-term or long-term loan based on their ability to repay the balance. While it’s ideal to pay off the balance all at once, if a longer-term loan is best for the borrower, you can work together on a specific repayment plan that works for both of you.
- Their borrowing history: Have they borrowed money before? Are their debts current and current? If they have taken out loans or borrowed from you, you will get a better understanding of their repayment habits and shortcomings.
it comes down to
Guaranteeing repayment can be difficult if you lend money to friends or relatives. However, there are ways to minimize the risk. Agreeing on repayment in advance and creating a written loan agreement is essential to avoid miscommunication and ensure that you are repaid in the best way for both parties involved.
If you can’t get your money back, consider options that minimize relationship risk, such as forgiving the debt or extending the repayment term. To prevent this from happening in the first place, carefully evaluate the borrower’s finances. If you have any hesitation about lending to them, you may want to stay away to protect your future financial health.
