Dos and Don’ts Of When Giving A Loan to A Family Member

It is often said that lending money to a family member or loved one can put your relationship in jeopardy. But it can be impossible to say no at times. It is advisable to be smart when loaning money to your family member. Just consider setting up some terms and conditions for him/her and schedule for repayment with your family member.

Let’s have a look at some dos and don’ts of lending money to a family member or a friend:

1.      Always ask why he/she needs money:

You should always ask your family member why they need to borrow money. Understanding his/her need will help you decide whether or not you should give a loan. You should consider loaning only for their necessary requirements such as paying house rent, paying bills, buying food or taking care of their family needs.

 

2.      Loan or gift?

Before you give money to a family member, you should first decide whether you are agreeing to give a loan or give money as a gift. It is important that you consider whether you are giving money for personal issues or practical expenses such as tax and EMIs, etc. To avoid a level of resentment in your relationship, it is advisable that you balance between a loan and gift. If you give a loan then have it in writing, but if you give the money as a gift then give it with no expectation in return.

 

3.      Prepare a loan agreement:

It is always good if you draw up a loan agreement to have all the terms and conditions in writing. From how much money you are loaning to the payment schedule, it is advisable to set up a contract in order to gain a clear understanding between yourself and your family member.

 

4.      Have a witness to sign the loan agreement:

If you have the loan agreement signed by both the parties, then you do not need a witness to sign the contract. However, a witness can be valuable when loaning to a family member. If you plan to take any legal action against your loved one for non-repayment of the loan, a witness can surely help you win your case.

 

5.      Learn to say “No”

If you find yourself in a situation wherein you have to refuse the loan then learn to say no without the fear of damaging your relationship. A family member or your friend will understand if you explain them the appropriate reasons for refusing the loan. Always enquire about your loved one’s financial situation from time to time and be in touch with him/her.

 

6.      Charge Interest

If you are lending money to a family member, it is only fair to charge interest on the loan to safeguard yourself. It will definitely inspire your family member to make the repayments in a timely manner.

 

7.      Do not micromanage your family member’s earnings

Once you have given a loan to a family member, do not keep micromanaging their income and spending. You have inked the loan agreement and it is only fair to maintain some distance from that family member until he or she pays back all the loan in a timely manner. The loan that you have given is no longer in your control and your only goal should be to focus on repayment.

 

8.      Deal with cash only

If a family member asks you to open a credit card account on his or her name, or request you to co-sign for a loan, do not approve of this at all. Controlling cash is within your reach and lending will not affect your credit score or history in any way. So always deal with cash instead of considering any credit option for your loved one.

 

Therefore, relationships sometimes trump the traditional money sense. Keeping all your financial decisions aside, giving a loan to a family member may prove to be a positive experience.