With the economy in the hole and job losses mounting, many people could use extra cash – and may ask turn to friends and family for a loan. While some people regularly accept money from parents, others may be asking for the first time. This is a sticky situation.
“There’s the potential for personal problems and financial trouble when it comes to lending to those close to you,” states a recent USA Today story. “Experts advise you to treat the deals like the business transactions they are.”
I agree. I would have to be in a real pinch with no other possible solution in sight to ask for a loan from my family, partly because I have seen the other side. My parents have been the lenders and family ties have been broken because of money. The USA Today story advises how to avoid personal problems. My advice is simpler – don’t do it.
If you are considering loaning or borrowing money from a friend or relative, however, here are five suggestions to protect yourself and your relationship.
1. Make it your last resort – Before asking for a loan from a friend or relative, try cutting costs by saving on eating out, cutting out unnecessary utility bills, or getting a second job. If you are the lender, try to help the person by helping them find a second job or being helpful without expecting anything in return.
2. Put it in writing – As the USA Today story suggests, treat it like a business transaction and write out a contract making sure both parties understand the terms of the agreement. Include what the interest rate is and the payback terms.
3. Consult a lawyer and tax professional – Make sure to run the contract by a lawyer to make sure the terms are legally binding in your state and a tax professional to figure out the appropriate interest rate for the amount of the loan.
4. Be honest with your lifestyle – While the loan is outstanding, make sure you are not living a life of luxury as ill feelings may be stirred up in the person that loaned you the money. Life a simple life and don’t go into more debt until the outstanding loan is paid off completely.
5. Mum’s is the word – Awhile-back Bargain Babe wrote about helping out a low-income friend and spoke to an etiquette expert who said one of the no-nos of giving to a friend is telling others about your generosity. Keep it on the down low because the recipient might not want others to know.