Friend and Family Loans: How to Get your Money Back
At some point, we may be faced with the situation of having a family or friend borrowing money from you. It is a tricky situation, and may end up being disastrous if not handled well. You may have their best intentions at heart and would want to do your best to help them, but you still end up thinking about your financial standing first.
As such, here are some things you should consider before writing them a cheque.
Can you afford to lend?
Before you even think about having to lend money, you should first think if you have the capacity to let the money go.
Note that this isn’t just about whether you actually have the money – but that lending it to somebody else means that you won’t get it back for the next few months or even years.
You need to first consider how you will be able to work around an emergency expense. Will your remaining money be able to cover it, or will you end up borrowing yourself?
Also, if you are in the middle of clearing out debts, or saving for a car or a house, then think about how lending the money will set your goals back.
Can they afford to borrow?
Another point to consider is the paying capacity of your borrower. Will they be able to repay you as agreed, and will they pay you without you having to chase them?
If they are currently employed, consider their income and any other financial obligations they need to fulfill.
If they are not earning much, and are also having a hard time keeping up with their bills and potentially, other loans, will the money you will lend help them? Or end up putting them in more debt and you could just end up losing money? It may also be a good idea to look at how they have managed their finances before.
What do they need the money for?
The reason that your friend is borrowing could also possibly influence your decision. If they need it for critical repairs or an emergency medical situation, then you may be inclined to lend as opposed to hearing that it is for a vacation or for a gadget.
Note however, that there are people who are reluctant to share the reason for borrowing; but remember that this is your money at stake, and you do have the right to know what the money will be used for.
If you feel that they are hiding the actual reason why the money is needed, then be wary of lending the money. As an alternative (if you are inclined to lend but are rather suspicious of the reasons), you can offer to directly pay where the money is needed.
Will you earn through lending?
As if the topic of lending itself is not tricky enough, it is even trickier to decide if you will be charging interest on the loan, and how much will it be.
Remember though, that you are taking money out of your own savings account, or reducing the money you were supposed to pay an existing debt with, and are currently faced with the risk of losing that money by lending it to a family or friend.
It may seem harsh, most especially if you see that the need for money is genuine – especially for an emergency. But remember that not charging them with interest means that you will lose money you could have earned (or debt you could have cleared) because you lent it to somebody else. Think about adding up the amount of interest you could have earned if that money stayed in your savings account.
Secure the loan through collateral
While this may only be applicable for rather extreme cases, you can find security in the form of collateral when lending money to a friend or family. This way, you are at a lesser risk of completely losing your money as you are given something valuable to hold against the value of the loan until it is completely repaid.