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Nov
26

Things to be Consider before Lending Money to Family Members or Friends:

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When a friend or family member asks to borrow money, think about why they’re asking you and not someone else. They may see lots of money coming into your business, payroll being met, maybe your nice house and car. What they don’t see is the credit line that keeps your doors open or how thin your profit margins really are. Still, that hasn’t stopped many business owners from learning the hard way that family, friends and finances don’t always mix.

When a family member asks you for money, choosing to help can be a very difficult decision. Many experts suggest that it is not a wise thing to do, but with family, it can be almost impossible to say no.

Of course, not all loans to family and friends end in disaster, but the potential for trouble is so great that you should think twice before saying yes. To save yourself a lot of grief, consider in advance how you’d handle any problems; in particular, ask yourself what would happen if the borrower never repaid the loan. How would it affect your finances–and your relationship?

Some people simply decide they’ll never make personal loans: If asked, they say, “Sorry, but it’s my policy never to lend money.”

That said, if you feel you must extend credit to a family member or friend, follow these rules. You’ll be glad you did.

For this reason, learning how to lend money to family members and Friends are always suggested. By doing so, you will be able to provide the finances without the stress of wondering if you will ever get paid back.

Determine whether the family member asking for money is responsible enough to return It.:

Only you can decide if a loan will be paid back. Obviously, a family member who is habitually overspending and is currently in debt would not be a good person to lend money to.

Discuss other options:

You can discuss with your friends and family member that are there other ways to help? Money isn’t usually the only solution. There are so many ways to find the right option for the solution of the particular problem.

Check whether you afford it or not:

You may never see the money again, so don’t put your own financial well-being on the line. It can be hard to see a loved one struggle financially, but be realistic about your own ability to lend them money. Will lending the cash mean that you will have to put some of your own plans on hold? If so, Check whether you are willing to make that sacrifice or not.

Be clear about your expectations:

Draw up a payment plan. You can use the online calculator at Bankrate.com to create a loan schedule. And discuss what will happen if something goes wrong.

Check out, what will the money be used for?

Even if you have the money to spend, you don’t want to enable bad habits. Only lend money if it’s going to be spent toward a specific goal or purpose that you’re comfortable with. The money should never come out of your current budget, your hardship savings, or any retirement funds. The truth is you still have to be prepared that the family member will not pay back the loan.so Check out the exact use of money.

Is it a loan or a gift?

Will the money you give be a loan that you charge interest on, or a gift? If it’s a loan, the IRS requires you to charge an interest rate equal to or greater than the applicable federal rate, which is set monthly and is usually lower than the market rating. You will also be taxed on any income you make from these loans.

Develop a payment plan that meets the budget:

If you’re going the loan route, guard against any potential disagreements by getting the terms of the loan in writing, such as the amount, interest rate, length of the loan, and the repayment schedule. Be sure to also note whenever any amount is paid back. Be realistic about how much can be paid during what period of time. Don’t set your family member up to fail. Smaller payments are always easier to pay off than the whole amount, not just for the family member, but also for you. This way you can see your money being returned.

Be prepared to lose your money:

Lending money to the people closest to you is almost always losing proposition. Family members may ask you for a loan because they’re looking for lenient conditions. So unless you can deal with the prospect of never seeing your money again, don’t make the loan at all.

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Category : Flatons Advisors Blog

 

 

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