A Dutch proverb reads, “Who ventures to lend loses money and friend,” and often the same can be true of family. Understanding the circumstances in which you’re being approached for a loan by a friend or family member, and putting parameters in place from the start, can keep the sentiment of that proverb at bay and your relationships intact.
A study by Finder a few years ago found that one in three people surveyed borrowed money from someone they knew, so numbers suggest it’s likely you’ll be asked to loan money at some point in life. If you’re the lender, it can be very difficult to say no to loved ones who need a little financial help. If you are approached by a friend or family member for a loan, here are a couple of things to keep in mind before opening your wallet, checkbook, or cash app.
- Have an honest conversation: What will the money be used for? How does the person you’re lending money to plan to pay it back?
- Approach the loan as a business transaction: Draft a contract that clearly defines the amount of the loan and the timeframe in which the money will be repaid. You may want to include an agreed upon payment plan that outlines how and when money will be repaid, e.g. in monthly installments.
- Try to keep expectations low. While you are treating the loan as a business transaction, it really isn’t. It’s a much more casual deal between friends, and often the loan recipient won’t feel pressed to make regular payments. If you can privately see it as a gift, you won’t be upset when it takes longer to be paid back or if you don’t receive the full amount.
- Consider the person asking. If someone asks you for money repeatedly and doesn’t keep up their end of the deal, it’s a no-brainer to hesitate next time they ask. Remember–it’s ok to say “no”!
