Do’s and Don’ts of lending to family and friends
Lending money to family and friends can lead to sticky situations – from easily-preventable misunderstandings (“Oh, I was s’posed to pay you back this year?”) to relationship-jeopardizing conflicts (“You bought WHAT with the money I lent you?”). So before pressing “send” on that online money transfer, prepare yourself by checking out our top Do’s & Don’ts of lending to family and friends.
Do
- Take care of yourself first. You should have a steady paycheck, limited debt, and an emergency fund before you even think about lending.
- Set a limit. If you are in a good position to lend, take stock of your finances and limit the loan to a dollar amount you could lose without it hurting you financially.
- Consider how likely you are to get the money back. You’re more likely to get repaid if you’re loaning to Trusty Cousin Sue who is facing a one-time financial crisis than Unreliable Aunt Carol who has a history of being financially irresponsible.
- Think about how it could affect your relationship. Saying ‘no’ now if you’re uncomfortable about lending could cause temporary hurt feelings but prevent resentment and preserve your relationship for the long-term.
- Get it in writing. If you can, set clear expectations by writing out what everyone has agreed to and giving everyone a copy. According to the Consumer Financial Protection Bureau, the agreement should answer the following questions:
- Who is providing what to whom?
- How much, how often, and for how long?
- Is this a one-time exchange, or happening on a regular basis?
- How and when will the lender be repaid?
- When will the arrangement be considered done?
- When or how often will you check in with each other?
- What happens if circumstances change?
- Who is providing what to whom?
- For larger loans, you may want to consider having an attorney draw up a contract.
Don’t
- Jeopardize your own finances. Avoid lending money to someone if it would strain your own finances or make it difficult to keep up with your bill payments.
- Cave to pressure. Never say ‘yes’ to a loan request because you feel pressured or obligated. Think of other ways you can help out, like pointing them to other resources for loans or providing non-financial assistance they need to get on their feet – from babysitting to providing rides to job interviews.
- Co-sign a loan without knowing the consequences. Co-signing a personal loan for a friend or family member in need may seem like a great alternative to lending money directly out of your own pocket. However, there are some risks:
- Co-signing a personal loan will have the same impact on your credit score as if you were taking the loan out yourself. If your family member or friend doesn’t pay the loan, the missed payments can lower your credit score.
- As a co-signer, you’d also be responsible for the entire balance of the loan if the borrower doesn’t pay. (Yikes!)
- Co-signing a personal loan will have the same impact on your credit score as if you were taking the loan out yourself. If your family member or friend doesn’t pay the loan, the missed payments can lower your credit score.
We can help
If you have questions about lending or borrowing, call us at 1-800-288-3425, send us a secure message in Think Online, or visit any Think Bank office.