4 Steps to Take If You Loan Money to Friends or Family U.S.News & World Report LPBy Trent Hamm | U.S.News & World Report LP – Tue 11 Mar, 2014 6:42 PM IST Email Share Print A friend or a family member is struggling with a financial problem. That person comes to you and asks you to lend money to help him or her get through the crisis. What do you do? This situation comes up quite often in tight-knit families where relatives have different levels of financial success. A struggling person will often look to a close aunt, cousin, grandparent or any financially stable family member for help in a crisis. Also See: How to lend money to family Put everything in writing. You might be tempted to settle for a verbal agreement since its with someone youre close to, but this leaves too many variables open to chance, says Thomas Fox, community ... more 1 / 6 U.S.News & World Report LP Share to FacebookShare to TwitterShare to Pinterest ClosePrevious imageNext image My solution is a hardline one. I dont lend money to family or friends, no matter what. For many people, however, this is an undesirable solution. Perhaps they do want to help, or perhaps they have difficulty saying no. Here are four important steps to consider if you are thinking about lending money to a family member or friend (or have recently done so). 1. Decide how important repayment of the loan is to you. If a family member or friend comes to you, instead of a financial institution, for a loan, the odds are that the person does not have strong enough credit to seek a loan via traditional means. Like it or not, that means the person has some risk of not being able to repay the loan. So if you give that person money, keep in mind it might not be repaid easily. Assuming youve already decided to lend your financial assistance, you have to ask yourself how important it is for that person to repay you. Is the relationship more important? Or are you more concerned about repayment? If he or she slips from their scheduled repayment plan, youre going to have to go down one road or another. Youre far better off deciding before it gets to that point so that emotions dont get in the way. 2. Get the terms of the loan written down, signed and notarized. If youve decided that youre going to insist on full repayment, draw up an agreement stating the terms of the loan.This is called a promissory note. Why should you do this instead of just trusting a handshake? A handshake wont stand up to legal efforts if you need to pursue repayment in that fashion -- a promissory note will. Your best option is to go through this documentation process before ever handing over the money. Require that a promissory note be signed and notarized by both of you before you hand over the money to the other person. Also See: 8 ways to become a better saver Find yourself in short of money every time you really need it for an emergency or a well deserved vacation? Make a list of your expenses, you just may be surprised to find out youre spending way too ... more 1 / 10 Investopedia | Photo by Thinksock Share to FacebookShare to TwitterShare to Pinterest ClosePrevious imageNext image 3. If the relationship is more important, think of the loan as a gift. If youve concluded youd rather have a relationship with this person than get all your money back, shift your thinking about the loan. Consider it a gift rather than a loan. A gift has no requirements at all for repayment. If a person chooses to repay you, thats up to him or her, but theres no need for to do so. If money is given as a gift, then you dont have to worry about nagging the person for repayment or moving through legal channels. However, the money you gave to that person must be considered a complete loss. 4. If a loan is unpaid, dont let the issue sit around unresolved. What do you do if a relative or friend has borrowed money from you but isnt repaying you? You need to decide -- and quickly -- whether or not youre simply going to consider the loan a gift or youre going to actively pursue repayment. The longer you allow the loan to sit there unpaid while you have negative feelings about the situation, the greater the damage youre going to do to your relationship with that person. Spend some time thinking about whether you want to pursue this legally or you want to just let the whole thing drop and write it off as a gift. The worst thing you can do is let the situation sit around and fester into something that could tear a family apart. Trent Hamm is the founder of the personal finance website TheSimpleDollar, which provides consumers with resources and tools to make informed financial decisions. More From US News & World Report The Hidden Costs of Loans How to Talk to Millennials About Money Your 10-Step Financial Recovery Plan @YahooINFinance on Twitter, become a fan on Facebook
Posted on: Sun, 16 Mar 2014 13:18:50 +0000
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