Lending Cash to Family & Friends the Right Way
Being smart with your finances comes with a lot of benefits – a good credit score, approval of loans with low interest rates, earning dividends on money you’ve set aside, ease and tranquility when going to sleep at night – but it can also cause trouble when family and friends aren’t as money-savvy. What do you do when the people around you need help, and you’re the only one who can give it?
Loaning to friends and family can be tricky, since worrying about getting the money back can cause tension between relationships and even destroy them. However, we’ve come up with a few guidelines to lending cash to your loved ones that will help you keep the peace and your peace of mind.
Only lend what you can afford.
It may seem obvious, but in the heat of the moment, it can be easy to get wrapped up in supporting the people you care about. Rather than say yes right after asked, ask if you can review your accounts and get back to them later. Even if you know you’ll be able to help, this gives you time to decide how much works for you, without them there to push you over the limit.
Only deal in cash.
Of course, this doesn’t mean you can’t write a check to your brother. However, co-signing for a loan, or opening up a credit card in your name for him to use, is not something you should do. While it might seem like a good idea to help them build credit, you’re effectively putting your ability to borrow or secure credit in the hands of someone who is already struggling. Cash means you control what’s being given, and it doesn’t affect your credit score.
Only loan with interest.
You aren’t being rude if you charge interest; you’re staying on the right side of the IRS. If you don’t charge interest, you could be charged gift taxes on the money you lent out. Instead, charge them at least the applicable federal rate (AFR), which is published monthly on www.irs.gov. Plus, this gives your cousin or neighbor more incentive to pay you back if they know the amount of money they owe is growing. Plus, it's always a good idea to create a contract when you lend money. If you establish your terms in writing, then you'll be in a better position when it comes time to collect on the loan.
Only loan what you’re willing to lose.
No matter how good your sister’s intentions are, there may be an instance when she won’t, or can’t, pay you back. Before you’re willing to give money away, decide how much your relationship is worth. If you won’t be able to move on if you never get your money back, you probably shouldn’t lend what you have. You may want to consider it a gift from the get-go, which will result in you getting a pleasant surprise when they do follow-through and pay you back.
Have you ever lent money to a family member or close friend? What advice do you have to give from the experience? Let us know in the comments below!
Want more info like this? Check out " Financial Empowerment: Identify Your Worst-Case Scenario "