10 Must-knows Before Lending Money to Others

It is delicate because it is difficult to say no to a friend during their financial need. At the same time, it is difficult because the loan recovery process has the potential to damage the relationship since such loans are largely informal and do not have a documentary record or terms and conditions regulating them. 

You should hopefully learn to say ‘No’ to avoid getting into such a situation. You can exercise caution if you can’t say ‘no’ to a friend. Lending money will alter the equation between your friend and you. The warmth between you as friends would recede and make your friend aware of his or her duty to you. 

These transactions are built on faith, which makes it hard for the lender to ask for their money back.

It’s only natural to want to assist them as much as possible while your friends and family are facing difficult times. If they need financial support to see them through a tight spot, it might be a very good idea to loan them money. 

Here are some useful tips to consider before lending money to others.

Have a signed contract:

A common concept behind hand loans is that trust, friendship, and blood links are the foundation of the agreement. While these are strong notions, if the creditor falters on repayment, they carry little meaning. Nobody asks you to draw upon stamp paper a full-fledged contract to have it sealed by the notary.

10 Must-knows Before Lending Money to Others

As it is good to set up contracts with your friends or family members to whom you are lending money. For this purpose CocoSign is well known as it is used widely, You should set up a promissory note for your friends, so get others promissory note template on CocoSign.

CocoSign is a well-reputed e-sign solution that is being used in 190+ countries by billions of users. It has 800+ contracts and agreement templates on its site which are free to use and customize according to your needs. All a user needs is to create a free account and follow some given guidelines.

10 Must-knows Before Lending Money to Others

Knowing how the repayments will come in will assist you to better manage your budget. Also, do not hesitate to tell the creditor about the payment dates for your loan and credit card. This will make them responsibly return your money.

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Just Cash:

Always help with cash. Never borrow your credit card or agree to sign up for a loan that your family member or friend can take as the guarantor. If you provide cash, your money won’t come back in the worst-case scenario. There is nothing to lose anymore. 

Using your credit cards for others is probably the worst way to lend money. Not only it puts your financial security at risk, but you also get into the risk of negatively affecting your credit scores if you fail to repay on time.

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Have the Means:

Spend just what you’re able to afford. Similarly, borrow just what you can afford. Bear in mind when lending to family and friends that your money might not come back. With this in mind, decide the sum of which you will part. Make sure it’s nothing too heavy to throw your finances off balance. 

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Get it in Writing:

While a verbal agreement is considered legally binding, it still comes down to your word against someone else’s, and without a written agreement, you could land in hot water even though you trust your loved one to abide by the guidelines you set.

On the other hand, if you have a written document, it will prove to be a great asset. You will appreciate it when the time comes.

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Profound Effect:

One is the effect on your finances. We are talking here about the effect on your relationship with other members of the family. Head scratching? 

Well, it could happen that you are lending money to one member of the family or a friend while rejecting another from the same circle. Words seem to go around now. This is going to place you in the bad books of the rest of the clan. You’re going to be seen as showing favoritism.

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Speak regarding reimbursement:

Before you lend someone money, including a loved one, make sure that the repayment terms are negotiated and agreed upon. 

Be clear as to how your money will be returned and when. Asking your family and friends about the intent of borrowing money may sound rude, but knowing the reasons will give you some sense of protection. 

And keep reminding them about reimbursing your borrowed money at regular intervals. You may even set up sms reminders that get sent automatically every time you text them. iOS has such a feature inbuild within its iMessage application.

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Keep relationships distinct:

There’s a saying that money destroys relationships. There are countless incidents of good friendships totally spoiled just because of money issues. So it is always advised to keep your relationship away from financial aspects. Stop letting money matters influence your friends and family ties, and don’t use a loan you gave someone as a tool against them!

Just in case you cannot avoid it, just make sure it does not become a harrowing experience in your relationships. Agree to terms beforehand and respect them.

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Take interest in interest charging:

You may feel rude and insulting in some circumstances to charge interest on the money you lend. Doesn’t that defeat a friend or family member’s goal of approaching you for money? They try to stop interest payments. 

But you, too, are walking away with your money and losing all the interest you could have gained. So, if the circumstances permit, speak of interest. You should, of course, charge lower than the market’s operating interest rate.

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Know-How to Say “No”:

Not always you are in a position where you can lend someone money. Others may recognize you as a source of emergency funds depending on your lifestyle and social behavior. But in case you are incapable, just politely refuse.

It’s okay to say “no” if you are uncomfortable lending money or simply can’t afford to. Instead, you can still help loved ones apply for private loans or try other options. In fact, there may be easy loan options available for them, they just need to re-assess it. You can help them with all the necessary guidance.

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The Worst-Case Plan:

The old phrase “hope for the best, plan for the worst” is perfectly applicable here. Think about how to deal with the risk of foreclosing on repayment by a friend or family member.

The first thing to think about is the amount you can afford to lose. Remember, the amount you are lending does not get invested into a company stock which will see ups and downs. Rather you are kind of giving free money without any collaterals. It won’t earn you an interest typically you get in other investments.

So, before handing over the money, think deeply about it. Are you ready for it?

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Wrapping Up

Your best bet, in the long run, is to structure your budget so that you can create an emergency fund. An emergency fund will help you prevent the need, to borrow money from a bank or loved one in the first place. 

It might be time to reassess your budget to see if you can either reduce your expenses or increase your income if you find yourself constantly asking loved ones for money. For setting Up contracts between you and your friends just use promissory notes templates available on CocoSign so just go for it!

That’s all about some easy points to remember before you jump into lending money. If you have further queries, just drop a comment below. I will be happy to help.

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Nirmal Sarkar is an M.Tech Engineering Student from the city of Joy, Kolkata. He is the founder of this blog and covers a wide range of topics from Gadgets to Software to Latest Offers. He is also active on the Blogosphere community on Facebook. You can get in touch with him via [email protected]

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