You would do anything for those you care about, because, well, you love them. However, there is a serious difference between lending your brother 10 bucks for lunch and loaning your best friend the money to cover this month's rent. Even if there is no written confirmation, chances are that you will want to see that money back at some point.
According to a study by Bankrate, 60% of people who lent money to a friend or family member expected to be paid back. Money and close relationships can be tricky, but there are some tactful ways to ensure you will get paid back in full while still maintaining your connections.
Write out an informal contract
Depending on the size of the loan, an informal contract will list out expectations so that both parties are on the same page. If you are lending a lot of money to your loved one, it may be worth it to have a formal contract drawn up by a lawyer. However, these tips for writing an informal loan will be a good place to start:
- List out the amount of capital that is being borrowed.
- Dictate a repayment schedule.
- Note if there will be interest paid, if any.
- Add a section about what will happen if the loan is not paid back in full.
It is best to have both parties sign the document for accountability. While it may be uncomfortable to talk about, listing out your terms will be best for you and them in the long run. Relying on verbal agreements can get more difficult as the amount of money being shared goes up.
Set your expectations upfront
Even though you may want to give your loved one the benefit of the doubt, you don't want to make a costly mistake. There are a few simple questions you can ask yourself to prepare for the likelihood of repayment:
- Have they asked you for money in the past?
- Are they known for being a reliable person?
- Am I willing to never see the amount of money I am letting them borrow again?
- What will they use the money for?
Many people need to ask for money from their families when starting new businesses, moving or embarking on any number of new endeavors. There may be a chance that the money you loan your friend or family member will not be paid back, so it is important to set realistic expectations for yourself.
In the end, loaning any amount of money to a person you have a good relationship with is a balancing act. It requires trust, and sometimes, it may not work out. Weigh your options and decide what is best for you in the long run. Reach out to The Federal Savings Bank to learn about the personal loan options available to you and your loved ones.
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