No matter who you are, sometime during your life a friend or family member will ask to borrow money. This is excluding the occasional change to buy a soda pop or candy bar. Lending money to friends or family can become problematic if guidelines and rules are not set.
To help eliminate some of the problems with lending money to friends and family, try some of the following ideas and suggestions.
To start off, never lend money that you do not have. By stretching your finances to help that special person, you might inadvertently cause financial hardship if something happens that wasn't expected. You and your family should be your utmost concern.
If you are lending money, do not spend your time worrying about how it is spent unless the loan was to be used for a specific purpose. While you may believe that since the borrower took the loan that the money should not be used for eating out or going to the movies, but it is now their money and there is nothing you can do. So if you cannot agree to this you should not lend money.
Once you agree to lend money be sure to get everything in writing. How much was loaned out, the duration of the loan, payment amount, and if there is any penalty or interest to be paid. It is okay to charge interest to family and friends. Make sure the borrower has the means to pay back the loan.
If need be, use a service like Circle Lending that helps facilitate lending money to friends and family and can set up automatic payments from the borrower's checking account to yours. There are fees related to this service but it takes the family and friend part out of the lending process and adds some security.
If you lend money and guidelines are set, do not expect special favors for your nice deed. If part of the loan includes yard work to be done or to name their first child after you, make sure that is part of the loan upfront. Otherwise treat them as you normally would.
For large loans (over $10,000) be sure to determine the tax implications, if any, for the loan. If the loan is for anything of value like a car or home, be sure to become a lien holder on the title or mortgage. This will protect you since the item cannot be resold without your permission or knowledge.
If you have to collect the money due to nonpayment, be sure to follow state laws and methods that other lenders use, such as a written notice requesting repayment. Use small claims court if need be in civil law, but this is where problems and strains can occur with the relationship. There are possible tax purposes, like writing off uncollected debts, but a formal request must be made.
There are other options then lending money to friends and family if you are uncomfortable lending money to them. Especially if you are unable to adhere to the above suggestions.
One way is to be a cosigner for a loan from a banking institution. People are more obliged to pay off a third party than a relative or friend. The draw back to this is that you become liable for the debt if it is not paid off by your friend or family.
Another idea is to give the money as a gift, since the alternative to giving the money may be collecting a debt because the loan was not paid back in full. This is a stressful situation that can easily ruin the relationship, even if it is family.
Finally, it is always okay to say "NO," if you know the friend or family is not responsible or doesn't intend to pay you back or plans to use the money for ill purposes like gambling. It might be that just maybe your gut tells you, "don't do it." Listen to your intuition, it is okay to say no. It could be that you simply cannot afford giving out a loan. Even if your intentions are good with the loan, you must make sure that you set rules and guidelines in order to protect yourself and your relationship with that friend or family member.