Things to Consider Before Lending Money to Family or Friends

If a family member or friend comes to you for financial help, this is something that needs a lot of consideration before agreeing to. This normally happens when someone can’t get a loan through traditional methods, like a personal loan or credit card, for which there must be a reason.

A loan from a family member/friend provides huge benefits to the borrower as there won’t be any fees or interest to pay, and the terms are usually more relaxed. But, it won’t necessarily offer any benefits to you other than providing help to a loved one.

Here are some things that you need to consider before agreeing to lend money, as well as some tips on how to go forward if you decide that you want to go ahead.

Things to consider first

How likely are they to repay the loan?

If a family member or friend asks you for a loan, then you have the right to understand their overall financial well-being in a little more depth.

It’s important to find out why they need the money and to make sure that you’re comfortable with the reason. You also need to find out how they plan to pay it back. Can they afford to pay you back in monthly instalments, or are they hoping to pay you back in a lump sum when something they’re waiting on (the sale of a vehicle, for example) materialises?

If you find out that they’re in debt and are already struggling to meet their financial commitments, then another loan may not be the right option and you should discuss this with them.

What is their attitude towards making it a formal agreement?

When you’re discussing the details of the loan, you need to assess their attitude towards making it formal.  Are they happy to make up a contract with you and create a repayment plan, or do they expect you to just lend them the money with no expectation of when they will pay you back?

If they’re not prepared to arrange a formal agreement, then you should definitely exercise some caution.

Will it harm your personal finances?

One of the most important things to consider before lending money to family or friends is how it will affect your own finances. You need to ensure that it won’t put you into any financial difficulty and that you still have savings/an emergency fund to fall back on if you need to.

Before you agree to the loan, make sure you’ve gone through your own finances thoroughly to make sure that it’s something that you can afford.  

What to do when lending money to family or friends

Make a formal agreement/contract

Even if it’s a family member or very close friend that you’re lending to and you trust them to repay the loan, you should always write up a contract. You can do this yourself if you wish, but you should get somebody independent to witness the agreement and sign the contract too. If you want to do things exactly by the book then you could hire a solicitor to draw one up for you.

The contract should include how much the loan is for, the reason for the loan, and the repayment plan. Doing this will ensure that you both know exactly what the situation is and what you’re agreeing to which should help to prevent any future problems.

Make all payments traceable

Instead of giving them cash, you should opt to do a bank transfer so you have a record of the loan. This way, no one can dispute the amount loaned or when it was given.

Repayments should also be done via bank transfer, again, to make sure that everything is traceable and to prevent any future disputes.

Revise the contract as needed

If you, or the borrower, need to make any changes to the contract then this should be spoken about and done together. If you need them to repay the loan sooner, or if they need more time to repay the loan, then you should discuss options and work out a solution that works for you both.

In conclusion

If you want, and are able, to provide financial help to a loved one, then this is a lovely thing to do. Just make that you approach the situation with awareness and be clear about making it into a formal agreement. Conflicts can arise when money is involved, even with those you’re closest to, so it’s important to take steps to mitigate any potential future issues.