5 Cardinal Rules of Lending Money to Friends and Family
It's a touchy subject, and discussing money matters with friends and family is usually in poor taste. However, there may come a time when somebody close to you needs financial assistance and asks for your help. Whether that someone needs to take care of this month's bills or pay off a creditor quickly, you may end playing the role of bank to someone you care about.
But when it comes to lending money, it pays to make sure you set healthy boundaries and are prepared for a potential shift in the dynamics of your relationship.
Here are five cardinal rules to stick by when lending money to friends and family.
1. Set Clear Terms
It's easy to be less formal when dealing with friends and family members but create some type of written agreement that explains all details of the loan -- the complete loan amount, date the loan will be paid back in full and interest you wish to collect (if any). Make it clear that this arrangement comes with some rules and that you expect to be paid back without any hassles. You need the other person to take it seriously so that you aren't going to be taken for a ride. Setting clear expectations will also help you stay on good terms with your loved one during the course of the loan repayment plan and after the loan is paid in full.
2. Keep It Private
Offering to help someone dealing with a financial crisis is kind and generous. Still, playing lender doesn't give you license to share your good deed with the world. Respect the other person and the situation she's in by keeping the entire conversation and the amount you are giving confidential. Don't inform other family members without the person's permission and don't advertise your generosity on social media. If you are genuinely helping this person out, the reward is in the giving and not what other people will think about it. Keeping things private also establishes trust between you and the person in need as she gets back on her feet.
3. Don't Expect to Get Your Money Back
When you are in a position to share the wealth with friends and family members, you may not end up getting your money back -- no matter how close they are to you and what terms they have agreed to. Expectations change when somebody owes you money, and when that someone is a family member or a close friend, that debt can create tension in the relationship. Unless you really aren't that close to the other person or are prepared to take the other person to court, consider that you may have to walk away from the loan at some point. Review your budget carefully to make sure you won't be stretching yourself too thin if the loan isn't repaid. If you can afford it, treat the gesture as a gift. This way, you won't end up turning from friend or family to foe over a money dispute.
4. Set Boundaries
Lending money to someone close to you can make you feel good and help someone in distress get a better handle on his financial life. However, you will want to avoid being the go-to person every time the person needs money. Set clear boundaries by devising reasonable monthly payment terms and an expectation that he will follow through on his promise. When you do agree to lend the other person money, make sure this is a one-time arrangement so he understands you won't always be there to bail him out at a moment's notice. You're still helping him, but also making appropriate financial decisions for yourself in the process.
5. Simply Say 'No'
If you have a hard time setting boundaries or always find yourself in a position to keep giving, you may struggle with simply saying "no" without feeling guilty. You have the right to deny the request and can do it politely. Simply state that you have a personal rule not to lend money to friends and family members, or mention that you don't have the budget right now. You don't have to explain yourself in any great detail but you do need to be firm about your stance on the subject so the other party is free to explore additional options.
Sabah Karimi is a columnist for the blog Wise Bread, where you can find consumer tips like how to select the best balance transfer credit cards.
