ARTICLES > Six Tips for Lending Money to Family or Friends.
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Six Tips for Lending Money to Family or Friends.
Here are five tips for lending money to family or friends.1. Before you loan any money, ask why it is needed. Once you know what the money is for, you need to decide whether you will lend it or not. Questions to consider are; ♦ Should you loan money for luxury items such as overseas trips or a flash new car? ♦ If the money is to be lent for vital reasons, e.g. to pay rent or buy food, or pay bills; will this loan fix the problem or are you only delaying the issue for a month or so? ♦ Is this person trustworthy and responsible? It is a sad fact of life, some people are just not responsible enough to pay back money owed. ♦ Has this person asked you or others for money before? If a person already owes you money giving them more could be considered foolish! 2. Draw up a contract.  No one wants to do this, particularly for family, but if a person is really sincere about repaying the loan they will understand. A contract will save any misconceptions or lapses in memory later on. And, it will prevent you being stuck with a bad debt in the future.3. Make your contract specific. A contract is not worth anything if it is not specific. The sorts of things that should be recorded in the contract are; ♦ How much money is involved. ♦ What the money is for. ♦ How the money will be repaid – a lump sum or monthly repayments. ♦ When the money will be repaid. ♦ The date the loan will be repaid or when the repayments are to be made. ♦ Any interest rate involved and how that interest is to be calculated. ♦ What will happen if the money is not repaid on time. ♦ What collateral will be secured against the loan, i.e. what, if anything, will they give you if they cannot repay the money. 4. Instigate the contract and repayment plan immediately. Even if you have negotiated a period of grace where the money doesn't have to be immediately repaid, the contract should record this and the repayment schedule should be set up to commence on the determined future date. 5. Get a witness to sign your contract. The law says a contract signed by both parties doesn’t need a witness, however, it’s still a good idea. Let the witness read and understand the agreement. The value of a witness is not just that they can be called upon to remind the borrower to repay your money. The involvement of a third party brings a greater sense of formality and accountability to the transaction. 6. Think of alternatives to repayment. It may be that a person borrowing money has a skill you could use. For instance, if they are a skilled home handyman or an able gardener, perhaps they could do a project around your home and repay all or part of the money that way. I know a mother who financed her adult daughter into a car so that the daughter could get to her part-time job. The mother knew things were tight for the daughter and so the arrangement was made – with a contract – that the daughter would do the mother’s housekeeping for one hundred weeks! They calculated at a rate of $50 per week and the loan was for $5000. The daughter thought it was a great arrangement. She got her car and all she had to do was spend two hours a week working at her mother’s home. By the way, you can lend money to family overseas. You can loan money to friends and family members in different countries, and you don’t need their signature on the loan agreement, but remember, email and text messages are legally binding contracts. So, make sure you describe the full terms of the loan in your email or text message. And make sure, before you hand over any money, that they respond with an email or text message agreeing to the terms – and make sure you keep the email! Related article - Six Things Your Teenagers Need to Know About Finances - Click here to read. |
