Everyone’s heard the saying don’t lend money to family or friends unless you’re willing to lose both. But not all situations are cut and dry, and occasionally exceptions to the rule need to be made. Will loaning money to friends or family ultimately destroy your relationship?
That’s a difficult question to answer.
Lending money to friends or family for business reasons is usually easier to consider than lending money to friends or family for personal purposes because even though the loan is familial, often working under the guise of “doing business” allows room for legal speak to enter the conversation.
When you loan money to a family member or friend for business reasons, often it is really an investment you are making rather than just a giving a loan.
Establishing certain parameters like the interest percentage on a loan, a monthly payment schedule, and limitations on the timeline for return on investment and then putting these parameters down on paper makes the loan more formal. Typically, this also ensures that all parties involved truly understand that there could be serious ramifications to not returning the money within the established and agreed upon boundaries.
If you decide you do want to give the loan and keep it on more of a personal level, at least consider getting a promissory note drawn up and notarized. Performing a simple search online will bring up a list of sites that offer state-by-state forms that you can use if you don’t want to employ the service of a lawyer.
Providing a loan for personal reasons to friends or family usually comes with a lot more gray area to navigate through. When friends or family ask to borrow money from you, it is sometimes tough to say no. Chances are there will be no legal documents to accompany this kind of loan. But there are still some serious issues to consider before you try to play the hero and pull your friend or family member out of a hole.
How significant is the hole and is it likely that your friend or family member will become a repeat borrower if given the opportunity? Do you have the amount of money available in your bank account to draw from? Never take money from your savings account to lend out and never lend more money that you are willing to lose.
You also must consider the reason they are asking for the loan. If the borrower is in deep with bookies, you should probably walk away. If however he or she is generally a responsible person and is in need of a few hundred dollars to tide him/her over until the next paycheck, this is probably a safer bet. You may want to think long and hard about giving out the money if you think that you’re going to be seen by your friend or family member as a quick way to get cash fast or that the loan is not going to be taken seriously by the borrower because “you’re family.” This is when things can go sour, cause hard feelings and put unnecessary strain on relationships.