Be the lender to your friends and family but with caution
Harry June 28, 2022

During the duration of necessity, be it for funds or expressive support, we consistently monitor our family first. You can leave out the lengthy documentation list if you borrow from a household member.

With a lender, it is compulsory to complete all the documentation requirements and attach to their terms and conditions. Every financial institution requires your documents and some tedious processes to cater to.

For many people, borrowing from a family member is a much more feasible option than borrowing from an external source. These external sources include lenders or banks, or any other financial institutions.

The lending side of you

Many people, instead of borrowing from a family member, plan to borrow same-day loans from the lenders and meet their funding requirements. 

In the case of lending money, if you are at the giving end, you have to be careful and take care of certain aspects. 

It is better to avoid any misunderstanding or confusion at the beginning rather than breaking ties due to any confusion in the middle of the process. It may hurt your relations and finances both. 

To be on the more uncontroversial side, consistently take legal help.  It may look awkward but make sure to follow this step. 

Tips to remember before lending money to your family

If you plan to lend money to your friends and family, follow the tips below.

  • Do not confuse it with a gift

Sometimes, if you lend money to a close relative or a friend, they may confuse it with a gift from your side and may not consider repaying it. They may take the whole loan process casually. 

Consequently, it is important to clear out things at the beginning. Your message should be very clear and should not stand a chance of any miscommunication. 

Be clear with the repayment timeline, the interest rate and any other aspects involved. Conclusively, ensure it is a loan and not a gift. 

  • Other than financial ways to help your family 

It is kind of your to help your family in monetary terms. But if you do not lend the money, you can think of some other ways to help your family, such as offering them employment or becoming a co-signer for their loan approval from an external source. 

Becoming a co-signer may involve the risk of impacting your credit score in case the borrower fails to pay back the original amount. 

If you do not want to offer money considering your future relationship with them, you can help them procure funds in any other way. 

  • Be aware of the legal formalities involved

If you have decided to lend money to your family or friends, make sure you know all the legalities involved in the process. Also, sound off all the legalities to the borrower as well. 

To secure your transaction, the best way is to hire a legal attorney who will make you aware of all the risks involved at every step. 

You also have to know the purpose of borrowing before you lend them the money. Once you have taken all the measures, you can go ahead with the lending process. 

  • You can use online modes

To ensure the security of your transaction, you can choose an online medium such as online banking. This will keep a record o your transaction and leave no scope for any conflict. 

If your family is insistent on getting cash, you can pay a small part in cash and the entire remaining amount through online banking. 

  • The interest rate

Mostly, the amount you lend to your family or friends is tax-free; hence, the interest rate is totally up to you to decide. It is crucial to know that if you are charging interest on the loan amount, it will be taken as your income that is taxable. 

Most people in need of money are willing to borrow from a family member or a friend to pay a lesser interest rate than the prevailing rates in the market. 

Thus, if you are charging an interest rate on the amount, you can decide the tenure according to you. The tenure and interest rate must be agreeable by both parties in order to run the process smoothly. 

  • Say no if required

If a family member or friend approaches you and does not have the funds to lend them, do not hesitate to say no. Communicate your condition politely y to them and do not be harsh in your approach. 

Be clear and polite with your reasons and offer them help in finding other alternatives for their funding.  

Why share a contract?

If you have any hitch or doubt, you can always go for a legal contract to make things official. You can also go for a promissory note, i.e., a promise from the borrower to pay back your amount within the stipulated amount of time. 

Be double-sure before lending the money. If the legal formalities are taking time, you can wait. But do not get into it without checking with the legal formalities. 

In your note, you can include any condition, such as the agreed interest rate, payback tenure, and the total amount payable. In case of an agreement, make sure to have witnesses to avoid any disagreement or conflict in the future. 

Before getting into any kind of agreement, always remember the consequences if the borrower is unable to pay the loan. 

You can check how payday loans work and then lend money. If you do not check, it can either lead to sour relationships or you may break the ties completely. 

Conclusion

You should always be careful in lending money to your family or friends. Consider each and every point before getting into the lending process. 

If things do not go in the desired manner, it can hamper your relationships and create a rift between you and your family. Hence, always look for warning signs first and then lend money.