We’ve all had the experience of being in a tight spot financially. If you are in a position to help a friend or family member recover from a financial road bump, great! Here are some guidelines that will help you handle the transaction with grace – including when and how to say “no.”
- Understand your own financial picture, first and foremost. This lets you know how much of a loan would be too much, for you. Remember, the amount you can afford to lend depends on your financial situation, not on the borrower’s need or sense of urgency. For one person, lending $1500 might be doable, and for someone else it could be a real hardship.
- If you are uncomfortable for any reason about lending the money, then your answer should be a loving “no.” Remember, you are not obligated by the personal relationship to come to your friend or family member’s aid financially at the expense of your own financial well being and peace of mind. You can be caring and supportive in other ways; by offering advice and encouragement, for example.
- If you agree to lend the money, don’t be shy about accepting interest. You may be tempted to offer your family member or friend an interest-free loan. Don’t do it! Your personal relationship will benefit from creating a win-win, businesslike transaction. The borrower should offer you in interest at least what you would earn if you kept your money in a high yield savings account.
- Work with the borrower to create a clear, reasonable, and short term repayment schedule. Keeping the repayment period short (about 12-18 months) improves the chance that the borrower will stay focused and repay you in full. Reality check: a long repayment period increases the risk that whatever problems created the need for the loan in the first place will return, preventing your family member or friend from paying you back.
- Regardless of the loan amount, interest rate, or repayment schedule, never lend any money that you are not prepared to lose. If you decide to move forward with the loan, do so with open eyes, prepared for the possibility of default. The survival of the personal relationship may depend on you making this decision up front.