Lending to friends and family

The costs associated with living are higher than ever before, intensifying the need for wealth. If one wants to start a business to earn, they have to invest a considerable amount of capital in it, and sometimes, they do not want to turn to banks. In such cases, they ask their loved ones.

Maybe your friend is launching a new startup, or your child wants to borrow money to purchase a car. In these cases, you may find yourself the subject of their attention if they perceive you as financially sound. Here’s what to do if your friends or family members want to borrow money from you:

1.    Examine Your Financial Situation Carefully

Your own circumstances are of utmost importance when giving a loan. Many individuals end up not saying no to their loved ones, which may be kind, but it ends up landing them in a financial mess. You need to keep all scenarios in your mind when making your decision: whether you are stocked enough for the near future, whether you have something costly you need to purchase soon, and, most importantly, whether you can afford to lose the money permanently. Keep in mind that defaulting is a realistic possibility, and you may not get the principal amount back in some cases. If you feel like you can not afford to let that particular amount of money go, even if you’re receiving interest, you need to say no.

2.    Enquire

You need to ask the potential lender the right questions. This goes beyond enquiring what they need the money for. Ask them why they are not getting the loan from the bank or using credit or why the bank is not lending them. This will let you assess their needs and their ability to pay you back. You also need to ensure that they are not using the money for any harmful activity. Ask them to give you details of repayment plans and the strategy they plan to use to make money again. It’s your money, and you have to make sure you aren’t being taken advantage of and that your money isn’t being used in dangerous activities.

3.    Formalize the Arrangement

Informal processes increase the risk of fraud. Work on a formal plan with the borrower and consider formally and legally documenting it. Drafting and signing a contract can help you stay assured, and your borrower stay dignified. A contract will aid you in tax filings as well as a legal document will ensure the loan does not get counted as a gift. Many online platforms facilitate friendly loan agreements by enabling you to draft contracts, set clauses, and provide relevant reminders; opt for such a platform to help you through the process.

Endnote

Not everything is about profit. Oftentimes, you may find yourself facing a situation where the borrower is in dire financial need and wants a loan. Use your personal judgment to rationally assess the situation while keeping the possibility of default in mind. You can opt to send them the money as a gift or offer a no-interest loan. Many live difficult lives; easing things for them will let you sleep better at night. No matter the case, having a formal arrangement is necessary to ensure that the process is professional and that no issues, like incorrect tax filings or instances of fraud, arise in the future.