Lending and borrowing between family and friends is a common practice in America. A survey from Finder revealed that Americans owe $184 billion to friends and family every year. And while it may be a common way to borrow money for some, it may also be risky. Loaning money to a friend might seem like a better alternative to standard lending options, but you should be very careful about who you lend money to.
If you’re currently looking for some quick cash loan options, or you’ve been asked for money by a friend or family member, then this article is for you. Read on to learn more about lending money to a friend or family member.
Lending Money To a Friend
We all have times in our lives when we could use a little extra cash. But, unfortunately, financial emergencies are not easy to plan for. Sometimes expensive things pop up, and our entire monthly budget gets thrown off. And if you don’t currently have a solid emergency fund, you may be struggling to find the money you need.
Whether your car just broke down or you received some unexpected medical care, unplanned expenses are challenging to manage. These kinds of costs are precisely why we recommend saving money every month and putting it into an emergency fund. But for those who don’t have an emergency fund may be considering a loan from a friend.
If your friend is in desperate need of a loan, it makes sense that you would want to help them. After all, what are friends for? But it’s common knowledge that money can come between friends and strain relationships that were otherwise fine.
Even if you trust your friend to repay you, this isn’t a decision to take lightly.
Make sure that you thoroughly contemplate this situation and come up with a plan for how you’ll handle this potential loan.
Common Reasons for Friends & Family Loans
There are several common reasons why people lend money to a friend or family member.
- To help them start a business
- They need money to purchase a home or condo
- They’ve lost their job and can’t pay for basic expenses
- They’ve become ill and can’t work at the moment
- To help them buy a vehicle
- They need to buy a computer or other electronic equipment
- To help them pay off debts like medical bills or student loans
Of course, some of these reasons are more pressing and important than others. Perhaps your friend would rather ask you than use a business cash advance or loan. But no matter the reason that your friend needs money, it’s crucial that you both come up with a plan that works for everyone.
It’s also important to remember that you’re under no obligation to lend money to anyone. So don’t allow yourself to feel pressured to provide someone with cash if you’re not comfortable with the situation. However, if you want to provide your friend with the money they need, you’ll need to create a contract and a payment plan.
Should You Lend Money To a Family Member?
Is it any different to lend money to a family member than to lend it to a friend? Ultimately, it’s a very similar situation.
Lending cash to family members can present the same benefits and challenges as lending money to a friend. While it’s great to help a family member in need, you won’t want to risk harming the relationship for years to come.
If your family member in question can get a good bank loan or another type of personal loan, that might be a better option. This way, you can avoid straining the relationship. But many people don’t have options like these because they have poor credit scores.
Having a bad credit score is one of the main reasons someone would resort to a loan from family or friends.
A low credit score means that many reputable lenders won’t work with you because you may have a history of poor financial habits.
The best thing you can do for your friend or family member that needs a loan is to help them understand how to improve their credit score. Improving their credit score means they will get good loans and interest rates from credible lenders in the future.
How To Handle a Friend or Family Loan
The first step in lending money to a friend or someone in your family is to work with them to develop a solid plan. There are several different aspects to consider before you give them any money.
Here are the most important things to agree on before you lend anyone money:
The Amount You’ll Be Giving Them (The Principal)
The is the total amount of money that you’re giving the borrower.
The Interest Rate You’ll Charge, If Any
You may be willing to provide an interest-free loan for friends and family. But, regardless of what you choose, put it in writing.
The Terms of Repayment
How many payments will they make, and how long will they have to return the total amount?
Lack of Payment Terms
What happens if they can’t repay the money? What happens if it takes them a longer amount of time than agreed upon?
These are the most important things to decide before you give them the loan. However, there are many other factors involved. For example, if you’re charging interest on the loan, you’ll have more to consider. This list is just the beginning of what you need to consider when lending money to someone.
Create a Contract
Having a written agreement is the most important thing you can do when lending money to anyone.
Whether you’re providing a family loan or a loan to a friend, you need to have the loan agreement in writing. You need to include all of the loan terms, repayment terms, whether you’ll charge interest, and anything else you’ve agreed to.
Having the loan details in writing may help you avoid conflict in the future.
A solid loan contract may help you avoid strain in the relationship, small claims court, and other pitfalls of personal loans for family and friends.
There’s a reason that every financial institution puts these things in writing. It’s to ensure that both parties are protected throughout the life of the loan. If you’re providing financial support to someone, you’ll need to have a loan agreement.
Luckily, several websites may provide you with a free template for a loan agreement. In addition, a quick online search can help you find exactly what you need.
Other Ways To Borrow Money
If you can avoid providing family members or friends with a loan, it may be a wise choice. Instead, consider helping them find a loan from a credible lender.
There are several loan options out there that may be precisely what they need. Personal loans come in many different shapes and sizes. And there are even personal loans designed to help borrowers who have bad credit scores.
A personal installment loan is one option that often helps borrowers with less-than-perfect credit. This is an unsecured loan, which means you won’t need collateral to get one. They also offer longer repayment periods than other quick cash options like payday and title loans. And some installment loans can even help you build your credit.
If your friend or family needs a loan, explore personal installment loans before deciding to lend them the money yourself.
Providing money to family and friends is a serious matter that takes a lot of thought and consideration. But as long as you talk with them and agree to all of the transaction terms, you will be protected should something go wrong. And it’s always nice to be able to help someone who desperately needs a loan.
If you’ve already lent money to a friend or member of your family, this article can still help. You can still put everything you agreed upon in writing and create a contract to solidify the agreement. It’s never too late to put it in writing.
Follow the steps in this article if you’re considering offering someone a loan. Then, put it all in writing, and come up with terms that work for both of you. And if you need to know how to ask to borrow money, we have more helpful blogs in the CreditNinja Dojo!