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image from https://www.choose.co.uk/guide/borrowing-from-friends-and-family-informal-loans.html

image from https://www.choose.co.uk/guide/borrowing-from-friends-and-family-informal-loans.html

10 Tips For Borrowing And Lending Money To Family And Friends

Laura Ayienga by Laura Ayienga
July 1, 2021
in Personal Finance
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Money is an extremely sensitive subject. Discussing it can be uncomfortable enough as is, and so it is necessary that we learn how to behave with and around money. There will be times where you need to borrow or lend your friends and family money. That being said, it’s important that we learn and inculcate responsible tips whenever we need to borrow. This helps to build our creditworthiness and maintain trust and camaraderie among our friendships.

In many instances, money has been a reason for friendships to break. If you don’t want this to be your narrative, here are some responsible tips for borrowing money from your friends and family:

  1. Know who you’re borrowing from or lending to

There have been situations where people are known for poor borrowing or lending habits. Some borrowers have been known to borrow and not payback, and others to be unopen and reliable. On the other hand, money lenders can be nagging or even go around bad-mouthing the people they have lent money to.

It is important that you understand the person who you are borrowing from or lending money. What traits do they possess? Are they understanding, or can money break your relationship forever? If a friend has poor credit history then you may want to let them down gently. Whichever role you are playing, both sides should agree on the terms before money changes hands.

  1. Lay down ground rules

When it comes to family and friends, it is sometimes hard to be firm and assertive with what you want. However, with money, I would strongly advise that you lay down ground rules about the repayment of your debts. If you are the one borrowing, you have to give assurance that you will work with the terms laid before you. Ground rules are important because they are a point of referral should anything go wrong in the future. Be open to discussing how the money will be repaid. If you are lending someone who isn’t open to this discussion, then this is a clear red flag.

It might sound unnecessary, to begin with, but it ensures there are no disagreements about who said what further down the line, which ultimately leads to resentment and bad blood between friends or relatives. Don’t be afraid to give different rules to different people even if they know each other, because again, people are different.

  1. Put it down in writing

It sounds a little crazy that you ask your friend or relative for money, and they draft a written agreement where you both need to sign. However, if you truly value your relationship, this shouldn’t be a problem. Written agreements provide evidence in the event that something goes wrong in your relationship. Keep records of any repayments, so there are no quibbles about someone claiming to have repaid when they haven’t or demanding more when their money is already in the bank. Each party should remain with a signed copy of the agreement and records. If it’s a huge lump sum of money you may even want to involve a third party to give witness to the loan.

  1. Be as open and honest as possible

At the end of the day, the money belongs to one party and the right thing is that it is repaid as agreed. Honesty is an extremely important trait in the process of borrowing money. Tell the truth about when you will be able to pay back, and where possible explain to the lender how you will be able to pay back. As the person lending the money, explain openly when you need the money back and be clear that you need it by then, no excuses. When borrowing money from your family and friends, you’ll most likely be faced with less stringent (if any) eligibility criteria. That said, honour your relationship by paying back as soon as possible.

  1. Discuss the payment plan

We’ve all heard stories where someone borrows a certain amount of money, promises to pay back within a certain period, and then goes ahead to pay only half the amount within the stipulated time. What borrowers need to understand is that sometimes when someone lends you money, it’s not that they don’t have any other use for it. It’s because they care enough to put their needs aside and help you out. Therefore, you have to honour the payment plan. How will you pay? The whole lump sum or instalments? If it is instalments, discuss the exact amount that will be paid and on which dates. Don’t be vague about it.

    6. Be realistic

It is important that you stay true to yourself about how much money you need before you borrow it. Run the numbers, and only borrow what you need and what you can repay, never more. If there’s a way that you can cut down the costs, do just that. Just make sure to be realistic so that you don’t have to go back to your loved one to ask for more. You also want to make sure you don’t borrow too much, which can create trouble of its own.

Similarly, the lender should be realistic about how much they can afford to lend. Don’t break your back trying to please your family and friends. Lend what you can afford to lose.

    7. If you are unsure about the loan, avoid it

This rule goes for both the borrower and the person lending the money. Among family and friends, you know one another. You have heard stories, and you can tell the honest people and those who may not be as honest. If you have second thoughts about lending someone money, don’t do it. Follow your instincts. If you do determine to do it, be prepared financially to lose the money. As a borrower, if you are not too sure about borrowing from that friend or that relative, don’t do it. That gut feeling will save you.

  8. Withhold judgment

Almost everyone has found themselves in a tough financial situation. Just because a family member has come to you for help, does not mean they have poor spending habits. Lending money to a relative does not give you a free pass to criticize their spending in the future. Likewise, if you’ve borrowed, curb the instinct to assume that, since your relative clearly has more money than you do, you’re entitled to some of it (or entitled to not pay it back).

   9. Show tough love if necessary

You know that saying about not mixing business and pleasure? As the lender, you may want to apply it here because if you don’t you may be the loser in the end. Genuine relationships will stand past the face of an argument. When it’s time to get your money back, be firm and assertive. State exactly what you want without covering it up with jokes.

  10. Feel free to charge interest

Typically speaking, all money that is borrowed should accrue interest. This rule should not always change when it comes to family and friends. Unless you are Mother Teresa, you probably do want to gain from lending people money. You shouldn’t shy away from doing so with family and friends. This actually pushes them to pay it faster.

To keep this professional and teach a financial lesson, you could offer a low-interest loan. You could make the interest affordable and lower than a bank or a shylock would charge, and this could be a good financial lesson for your family member.

Have you had a bad experience after lending people money? Tell us about it in the comments section.

Money conversations can be a very difficult thing, especially when dealing with family. People (your family) may feel like they are entitled to your money. How do you set boundaries? Check out this article on Dealing With The ‘Black Tax’

Find out 6 Responsible Money Borrowing Tips. 

Finances: The 7 Money Personalities You Should Know About

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Laura Ayienga

Laura Ayienga

I am a passionate 22 year-old writer. I consider myself a young free-spirited soul whose personality is a mixture of introversion and extroversion. I’m a strong believer in the law of attraction. Everything is a reflection.

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