In tough economic times, it becomes more likely that you'll run into family or friends asking to borrow money.
While some people rule out the practice altogether, there may be circumstances where you decide it's worth the risk. These are some points to remember when deciding whether to loan money to loved ones and how to structure personal loans.
Deciding Whether To Loan Money
1. Protect your finances. Review your financial status to know how much you can genuinely afford to lend. Your generosity may backfire if you wind up falling behind on other obligations.
2. Clarify the purpose. It's usually reasonable to ask what the funds are being borrowed for. You may want to distinguish between tiding someone over during a period of unemployment rather than buying them a larger television.
3.Encourage money skills. If you're dealing with someone with chronic money troubles, they may need more vital financial skills instead of cash. Offer to help them develop a budget or suggest free classes they can take at a local library or community center.
4.Provide other forms of support. Think creatively about all your options. Offer to babysit your grandchildren if the lack of child care is interfering with your children's job search.
5.Consider family dynamics. Favoritism or the perception of it can alienate family members. There may be valid reasons for treating individual children differently, but they seek to treat them equally.
6.Resist the urge to meddle. Be honest with yourself if it's going to gall you to see someone visit an expensive spa while they owe you money. You may both be better off if you decline their request in the first place.
7.Understand your intentions. It's curious why people complain about someone buying their affections when they appear willing to sell them. Still, you're better off with people who value you sincerely.
Structuring A Personal Loan
1. Please put it in writing. Draft a promissory note. You can find many simple templates online. Include the amount of the loan and the payment terms. If you amend your agreement, put those changes in writing too.
2. Calculate interest. Depending on the amount in question and other factors, the IRS may require you to charge interest. If you're using a credit card or withdrawing money from your savings, you may need compensation for any fees or losses you incur.
3.Consult professional advisers. Tax attorneys and accountants can advise you on your individual circumstances. Strategic estate planning may enable you to help your family on the most favorable terms.
4.Provide receipts. Write out a receipt for every loan payment. Keep a copy for yourself and give one to the borrower. It will help you stay on track and provide documentation if any misunderstandings arise.
5. Avoid co-signing. Co-signing for a loan is often an unacceptable risk unless there are extraordinary reasons to justify it. You are liable for the total amount if the borrower fails to pay. Even if they pay late, your credit rating will be hurt.
6.Maintain privacy. Keep the details of the loan limited to those directly involved. That usually includes you, the borrower, and any professional advisers.
7.Plan ahead for losses. Know in advance what you’ll do if your loved one fails to pay you back. For your peace of mind, you may decide it's best to write off the loss.
Protect your finances and relationships by proceeding carefully with loaning money to friends and family. Please take sensible precautions or look for alternative ways to help them out.