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5 Golden Rules For Lending Money To Friends And Family

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5 Golden Rules For Lending Money To Friends And Family

You may not be able to buy friendship with money, but you can certainly destroy friendships with it.

Lending money to friends and family is a very delicate affair, and like Dave Ramsey, I would flat out recommend never lending friends money, since money is always a difficult subject to talk about, personal loans can often lead to communication breakdowns which can wreck any relationship.

That said, if you really want to loan your friends some money, here are 5 key tips to follow to ensure that this loan does not destroy your relationships. If you are really lucky, you might even get back the money you loaned.

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1. Understand that you probably won’t get the money back.

If your friends or family are asking you for a loan, then they are not asking a bank for a loan. That is not a good sign. If you do want to loan out money to them, you need to stop and think about how important getting the money back is compared to not ruining your relations. If the latter is more important to you, it may be better to just make the loan a gift.

However, if you decide to make it a loan, you need to consider how important it is to get that money back. You need to be consistent about this, so that both you and the person you are loaning it are on the same page when it comes to paying the loan back.

2. Make a contract.

Your friend may want to make the loan a handshake agreement, promising that they will pay the money back at a certain point. Don’t let them.

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As you are making the loan, you get to set the terms. If you want your money back, a handshake agreement means nothing – a contract does. You can get a free promissory note here from Suze Orman which will let you set the terms of the loan. Also, get the loan signed by both of you and notarized. The latter part is critical.

If the worst comes to worst and you decide to take your former friend to court, a notary can stop them from claiming that they never signed anything. Your friend should have no problem being specific about repayment terms if they really intend to pay you back, so hold them to their word and get the contract written.

3. Don’t expect any favors back.

When someone owes you money, you may feel like they owe you something beyond the cash you gave them. You might think they should help you out with that weekend project you’ve got, or buy you a drink next Saturday.Thinking like that is a bad idea.

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If you signed a contract with your friend, then your friend agreed to pay the money back and nothing else. Expecting more is improper and makes it look like you are lording your better finances over him. Don’t hesitate to be firm about getting your money back, but don’t use it to get other perks or favors from your friend.

4. Ask if there are other ways you can help.

There are always other ways to help your friends beyond giving them money. You can teach them ways to make or save money. You could also help them around the house or office. If they are having problems with bills, you could even offer to pay the bill directly instead of loaning them the money.

If your friend is asking for help with a personal finance loan because they have a problem. Find out what the problem is and see if there are other ways you can help fix it. If they do not want to tell you, then point out that they have no right asking you for money if they won’t tell you what the money is for.

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5. Learn to say “no”.

As noted at the top, I would recommend against loaning any of your friends or family money; however, you may also have some close people who you consider reliable who have just hit a rough patch, and are confident that they will eventually repay you.

On the other hand, there are those family members who you would never trust with 50 cents. I have a family member who is incredibly compassionate and heart-warming – and that is the exact reason I would never loan her anything, because I know she would blow the money on the first sob story she ran into.

At certain points, you just have to say “no”. Your friend or family member may get mad, cry, or throw a tantrum, but this is your money. Offer other help as noted above, but learning to say “no” is critical to succeeding in general.

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If your friend is willing to break it off with you over a sum of money, then they were never really much of a friend at all.

Featured photo credit: Next Avenue via nextavenue.org

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