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What is the Best Way to Lend Money to Family and Friends? – Part 1

What is the Best Way to Lend Money to Family and Friends? – Part 1

We’ve all been there are some point of our lives: A loved one, a relative or a very close friend asks for a personal loan from us and, while all we want is to help, sometimes we might be blinded by love and completely forget to take care of some details before giving out the money for the personal loan. This carelessness can not only bring a lot of trouble in the future, it can also permanently damage your relationship with your friends and family.

Naturally, you are not alone in this scenario. In fact, when bank deny personal loans to people, the first place they go for help is family and friends regardless if it is a personal loan to finance a house, get a car, or start running a business. In a report published on the year 2011 by the National Association of Realtors, up to an impressive 7 percent of first time home buyers got their funds from a personal loan from a friend or relative. In similar fashion, up to 14 percent of small business owners accepted that they requested personal loans from either a friend or from a family member.

Getting a personal loan from your friends or from a relative can also be greatly advantageous: To start, you can get them at lower interest rates than what banks might offer you. Additionally, these kinds of personal loans also allows borrowers to completely avoid those hated hidden fees that traditional lenders tend to keep quiet about when granting personal loans.

However, no matter how much your relative or friend needs the funds, in order for everything to work out smoothly in the long run, you should take the necessary steps to secure you finances in a way as businesslike as possible, otherwise you risk permanently compromising your relationship.

Here’s an example of how it is done right: Let’s say a friend of yours or your partner asks you for a personal loan out of an urgent need. You of course, want to help, but before handing out the money carelessly you should think about securing your finances. To start, you both calculate an interest rate that suit you both, then you decide on a payment schedule, on a penalty for any late payments and lastly, an estimate time frame for when the personal loan should be paid off. That way, both you and your friend/relative end up with a good deal.

That said, here are a few pieces of advice as to how you should approach giving out personal loans to friends and family.

Everything Should be in Writing:

As tempted as you might be to settle everything pertaining that personal loan with a simple verbal agreement (after all, this is someone you are close to), this is the most careless thing you can do, since it leaves so much to chance. By putting everything about the personal loan in writing though, both parties see it as it is and give it its due importance. The agreement should, of course, spell out all of the interest rates, terms and conditions agreed upon beforehand in plain English and with clear due dates and penalties in case the borrower defaults on his/her payments. You can go even further and have the personal loan document notarized, which will definitely give it far more legal standing in case the borrower defaults.

The Importance of Communication:

Good communication is essential in transactions like these. Personal loans can be of up to thousands of dollars, so everything should be clarified before the funds are transferred. Both you and your friend or relative should also be completely outspoken and agree to communicate upfront in case either you or them run into trouble paying.

This is a very important aspect of lending money to friends and family, since the slightest mistake and miscommunication can ruin years of good relationships.

Keep an eye on our next entry for even more tips on how to give a personal loan to a friends or relative the right way.