Consumer Comeback Blog

7 Questions to Consider Before Lending to Friends and Family

Written by Jeffrey Trull

loan-agreementThree famous lines from William Shakepeare’s “Hamlet” go:

Neither a borrower nor a lender be,

for loan oft loses both itself and friend,

and borrowing dulls the edge of husbandry.

It’s a notable word of warning, yet one that so many individuals don’t truly value and understand until experiencing a personal lending disaster themselves.

Of course, it’s not all bad, and there are cases where personal loans are of great benefit for both parties.

Whether you’ve decided to fork over the cash to your friend or not, think about all these factors first.

Can You Get It in Writing?

Getting the terms of the loan straightened out is a must. Of course it won’t guarantee success, but it’s essential to make the terms of the agreement clear and agreeable for both sides from the start.

At a minimum, all the terms need to be in writing. This makes the agreement irrefutable later on instead of just a verbal contract where it’s one person’s word against the other’s.

Terms you should remember to include are the amount loaned, interest rate (if you’re charging one), and repayment terms including monthly payment amount and the length of the loan term. To simplify the process, use a loan agreement template that can be found online for free. To calculate monthly payments with interest, a loan calculator or spreadsheet will do.

Don’t forget to have both parties sign to make your contract legally binding. Even if you never intend sue your friend or family member in court, proper contracts convey that this is a serious transaction and that you expect to be paid back according to the terms.

Can You Live Without This Money?

If you’re lending money, you need to okay with potentially never being repaid. You shouldn’t lend money that you can’t afford to lose.

In some cases you need to say “no” for the sake of your own financial well-being. If you’re in debt yourself, it’s hard to justify lending anything and potentially losing it all.

Maybe you’re saving the money for a specific purpose like retirement investing or a down payment on a home. If losing this money means you’ll miss out on something important to you, a loan isn’t worth the risk.

Are You Prepared for Tension in Your Relationship?

Aside from saying “goodbye” to the money if the borrower doesn’t pay you back, will you be able to let go of any hard feelings towards your borrower?

Even with the best intentions on both sides of a personal loan, there’s always the potential for something to go wrong with both the repayment of the loan and your relationship with the borrower.

If you sense even the slightest feeling that your relationship will be affected by making this loan, think long and hard before going through with it. While it’s an awful feeling not to be able to help someone you love that’s in desperate need, ruining your relationship is rarely worth that cost.

Even if your relationship isn’t completely at risk, imagine your future interactions with your friend or family member and how you’d react to watching them spend money in ways you’d prefer they didn’t.

Picture this scenario: Your friend borrowed $1,000 from you to pay for a car loan he’s behind on. But then he buys a new laptop just a week later. How do you feel? Would you regret your decision to lend to him? If you can sense your blood pressure rising, reconsider making the loan since you may have to face tough situations just like this one.

Are You Really Helping Your Borrower?

If you’re lending the money, you have every right to ask what it’s for. If you find out your friend is asking you to fund some wacky business venture she dreamed up last night, you might decline to put your money on the line.

But if she’s asking for money for cancer treatment that she’ll be seriously ill without, that would be a more legitimate need for lending money.

If the request falls somewhere in between these two examples, make sure you’re actually helping them and not just letting them continue on with bad habits.

If your brother is just looking to buy a new car and finance it through you yet he’s clearly not making good financial decisions in his life, you may be doing him more harm than good.

Have All Other Options Been Exhausted?

Did your potential borrower try every available option before coming to you? This may seem obvious, but if the loan is for something that can be traditionally financed through a bank, like a car or a house, it probably makes sense to start there.

Maybe your brother is pitching you the idea to have you finance the car for him, and he’ll pay the interest to you instead of the bank. While the idea of both helping a sibling and making a few bucks may be alluring, consider the worst case scenario if things go bad before you start looking to profit.