How to properly lend money to friends and family

When a friend asks you to borrow money, you find yourself in a minefield. On the one hand, you yourself probably fell into financial holes and understand how hard it is to get out of them without the support of friends. And you really want to help a loved one. On the other hand, you have heard many stories about how friendships collapsed due to the emergence of an ambiguous financial relationship. In this article, experts advise on how to properly lend money to friends.

Rule # 1. Say "yes" if you are really ready

Irene S. Levine, PhD in Psychology and Blog, advises first of all to suppress the guilt feelings that arise when the person asking is desperate, or when you yourself think you’ll be a bad person if you don’t lend money.

If you lend money without being completely sure that you want to do it, you risk feeling resentful, and your relationship with your friend will deteriorate even before he can repay the debt and can repay you.

Refusing to lend money will not turn you into an egotist and a bad friend. On the contrary, you can save a good relationship this way.

Carefully refuse: "I would be very happy to help, but now I have no money at all." If you feel that you must explain your refusal, add a reason: you have unexpected expenses, you are saving money for something significant (teaching children, an apartment, a car).

Think about how you can still help your friend in this situation. Perhaps you have ideas where you can borrow or earn the required amount. A true friend will thank you for any help. If he takes offense at you, it is all the more good that you did not borrow money.

Rule # 2. Give as much as you are willing to lose

Your friend or family member can be as proven, financially stable and reliable person as you want, but no one is immune from force majeure situations.

Imagine how the tension between you and your best friend or relative will grow if you urgently need the money that you borrowed, and for reasons beyond his control he will not be able to return it on time.

Byron Ellis, a financial planner, recommends borrowing only the amount of money that you are ready to say goodbye to, and this will not affect your personal financial goals and savings.

Rule # 3: Set strict deadlines for debt repayment

We often say: "You will return it when you can." After all, it is strange to demand from a friend or relative the return of a debt just in time. But imagine the situation: you gave several hundred thousand to your sister to buy an apartment. She promised to return them as soon as she got to her feet. But several years have passed, and the money is not visible. They have already depreciated taking into account inflation.

Byron Ellis advises to discuss the conditions "on the shore": after what time, with what interest and what portions you will be repaid. So you will not find yourself in limbo, not understanding when this money will return to you and whether it will return at all. And the borrower will understand that he is obliged to return the money in due time, and will not allow himself rash spending.

Rule # 4. Always have a written contract

Priorities change, memories are erased, and now your debtor assures that you agreed in a completely different way … Another advantage of a written agreement: when signing it, the borrower realizes the seriousness of this step and that he must repay the debt within the specified time frame.

If the borrower missed a payment, there is always a paper that you can refer to in a disputable situation. Friendship is friendship, but the obligations that you subscribe to must be fulfilled.

Byron Ellis Financial Planner

For small amounts, you can draw up a contract yourself, but when it comes to a large loan, it is better to hire a lawyer.

Priyanka Prakash, a former business lawyer and now a finance specialist in, says that the contract must specify the date of receipt and the amount of the loan, the maturity of the debt in full, the payment schedule if the debt is paid in installments, the agreed interest for late payment, full contact information of the lender and the borrower. Must be signed by both parties.

Rule # 5: Don't Allow the Borrower to Miss the Payment Deadline

It is a big mistake to forgive late payment and not even try to find out why the borrower is delaying it. If the due date is more advisory than mandatory, your friend will continue to safely ignore it.

Once again, the contract comes to the rescue. Write down the penalty for late payment. Naturally, your friend, when signing a contract, must understand what he is going for. Hopefully, this tactic will save you the hassle of sending out payment reminders and you won't regret that one day you decided to play banker.

Ellis advises to set a five-day period during which the borrower can make a payment without penalty: after all, there are different situations. However, if the delay is longer, and a friend ignores calls and reminders, then it makes sense to think about going to court.

If you lent money for a long time and agreed on a one-time repayment of the payment, then a month before the expiration of the term, remind the borrower of the agreement.

You might think these rules are too strict when it comes to helping friends and family. In fact, this is how you can maintain a good relationship, not marred by innuendo and resentment related to finances.