Since the economic crisis in 2008, the loan industry has become much more strict. The requirements and conditions for getting a loan approved are higher than ever. This has led to many turning to friends and family to borrow money at unforeseen expenses. What should you as a friend or family member think about if you get a request to lend money?
5 things to think about before
There has been a clear trend that more and more people are turning to friends and family to borrow money. Both for people buying a home for the first time and small businesses are now turning to friends and family for loans to a greater extent than before. You can easily feel tempted to help a friend or family member in financial trouble. However, knowing the situation can be tricky if you do not handle it properly. Here are five tips on how to best manage loans to friends and family.
If you want to avoid the risk of a ruined friendship or relationship because of an unpaid debt, the best option is to say no. However, if you really want to help financially then it is very good to set clear conditions so that neither party feels wrongly treated. You can also consider risks and take a credit report before deciding. There are of course also online services where both lenders and borrowers get help to keep track of installments and the like.
Determine if you can afford to lend money
Do not lend money if it risks putting you in a bad financial position. Look for your own house first. It may feel a bit strict when it comes to just friends and family in need, but it is not reasonable that you lend money if you find it difficult to get the economy together. May sound very logical, but this is something that many ignore.
It is very important to have a written agreement in which the loan terms are clearly stated. Be sure to include the loan amount, how and when the loan will be repaid and what the interest rate looks like. The agreement should then be signed by both parties, and even better if there are witnessed signatures.
Take out interest
If it comes to a loan on a smaller amount then it may feel reasonable not to bother to charge interest on the loan amount. If, on the other hand, what this article focuses on is about larger amounts, it is good to charge interest on the loan. Not necessarily to make money on the loan, but also for tax-technical reasons as this should be included in the declaration by both parties in accordance with the Income Tax Act.
Prepare for lost money
Last but not least, be prepared to lose money. Simple psychology is the explanation for this, as friends and acquaintances usually expect you as a lender to be more understanding because of your relationship with each other. This is also why you need to be sure that you can manage without the money, if you do not get them again. The alternative is to recover the loan through the debt collection company or the accountant. Something that is both expensive, time-consuming and stressful.
The good thing is that it is good to avoid lending to friends and family to the extent possible. There are loads of lenders today that offer everything from quick loans to mortgages, and you may want to tip your friends and family members about this if the issue comes up for loans.