Lending money to friends or family? Beware.

When your friends or family need help, chances are you’d step in right away to lend a hand. But when the favour extends to lending money to friends or family, the conversation can get a little awkward. You shouldn’t feel guilty. Lending money to friends and family is a big deal with potential implications, socially and financially for everyone involved. In that regard, you should stop to consider all scenarios.lending money to friends

“Unlike regular loans from a bank or other lending institution, a loan between family and friends isn’t really regulated, which means that you could make yourself vulnerable financially if your loan does not get repaid,” says Jeff Schwartz, executive director, Consolidated Credit Counseling Services of Canada.

”Lending money to a family member or friend can be uncomfortable, so why make it worse than it has to be?  Remember, you are trying to lend a helping hand financially, not change them as a person.  If you are not in a position to forgo repayment of this loan, don’t lend it.  Sometimes it is better to treat it as a gift, instead of money that must be repaid,“ says Schwartz.

Why you?

Why are they coming to you? Have they already approached the bank and been turned down? Maybe their debt load is too high and the answer would be to seek debt management support, rather than borrowing more money. Perhaps for whatever reason their credit repayment history is poor, which means that the chances of you getting your money back could be compromised.

Either way; no matter how awkward the question, these are details you need before you proceed.

Can you afford it?

The minute that you lend that money out, you have to operate under the possibility that you won’t see it again. Are you comfortable with that? Furthermore, are you able to afford that?

As a basic rule of thumb, only lend out as much money you can afford to never see again. And furthermore, never, ever take on debt to lend money to someone else. If that money doesn’t get repaid, not only will you be out of pocket, your credit could get damaged as well.

State your expectations

Before you lend money, clearly state your expectations to your friend or family member. Make sure they are in agreement with them and draft it up in writing. Charge interest (even if it is a small amount) and set out the terms (i.e. how long with the loan be extended? Will you pay by cheque or cash? How often will you submit payments – monthly or otherwise).

Not only does this avoid miscommunication, it formalizes the agreement between you, which is important when you are dealing with money.

Do you have a friend or family member in need of financial support because of mounting debts? The answer may not be to lend them money, but to help them get rid of their debts once and for all. Have them call one of our trained credit counsellors at 1-888-294-3130 or get started with our online debt analysis.

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