Lending family money to a friend is certainly not a good investment option because you do not know whether you will get that money back or not, plus if the borrower defaulters, not only you lose the money, but the relationships with your loved ones get an unhealthy blow.
However, when a dear friend or a close family member says that they need the money, and you are the last resort because the banks would not lend them money because of a poor credit report, you may feel obliged to help them out, if you have that much of money. However, great precautions need to be taken before you lend your hard-earned money especially to a family member, as you are investing your money and your trust into this person.
We give you some tips on how lending family money, may not put in some risk:
• Only lend cash- If a family member asks you to co-sign a bank loan or give them a credit card on your name, simply say NO. You should not hurt your credit score, when you will not be sole action taker on that money. Someone else’s actions should not put you in a situation that you yourself become a defaulter in the eyes of the financial institutions.
• Give only that much money which you can afford- Don’t just say yes to any amount of money your family may ask. You also have expenses and you cannot let your immediate family suffer just in case the borrower defaults on his payments.
• Have everything written-Although it may seem awkward, but get everything in a written and signed document. Discuss about everything, the loan amount, interest rates, how the money will be repaid and in how much time, penalties for late payments and non-payment. Have everything written down, to avoid any last minute confusions.
• Do charge interest – Even though it may sound awkward, but you need to charge interest on the money you lend. Otherwise you will be levied gift taxes on the money you lend.
• Move away from that money- One of the things that people start doing is micromanaging the accounts of the borrowers, meaning they start putting their nose as to where that money is being spent by that family member.. You have given that money like a bank, so now distance yourself from it. Just take care of the repayments, not the entire amount.
Although lending family money is a tricky job, you can do it if someone really needs it. However, take all the precautions before you risk your finances and relationships. Planning some money for this purpose while creating the family budget can make it easier to have some extra money to borrow.
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