Why you should think carefully before you loan money to family members or friends
Leading money to a family member or a friend at the time may not be a big deal, depending on the amount. However, many problems can arise from it over time. Here are a few reasons why you should always think carefully before you loan money.
- You might not get the money back - You never know what might happen in your life where you need some emergency money or back-up money and in effect have to ask for the loan back. The borrower may give you some or most of the money back, but you may not get it back in full. Once someone falls into debt and gets into bad habits, it is hard to come out of them. If you’re lending money then it's appropriate to assume that you trust that person but you never know what kind of rabbit hole they’re in, so it’s always best to stay wary.
- It could ruin your relationship with the borrower - As mentioned previously, if you’re lending money to someone then its most likely going to be someone you trust. However, if it becomes a really long time before even talking about giving the money back, this may cause annoyance, which could end up in an argument, which puts your relationship in danger. Another factor could be if the borrower is lying about when they're going to give the money back or avoiding having a conversation about it. It could lead to the relationship ending, it may make it even more difficult to get the money. Or cause friction in the wider family or friends circle.
- Having to ask for the money back can be difficult and awkward - It is never nice asking for some money no matter how small, so asking for the money you lent to someone is going to be even worse. More often than not, the lender may not want the borrower to feel awkward and put them in a bad situation, this can result in the lender not wanting to confront the borrower.
- Loans may not be a priority for the borrower - The borrower may not see a sense of urgency about giving the money back, especially because the lender is a friend or family member. Usually, if you are taking out a loan from a bank, you’ll have a deadline, depending on the basis of the loan, however, if there is no set date for a deadline and because it is unofficial, the borrower may be more causal with the deadline. The bank also has penalties for late payment and failure to pay which family members and friends are unlikely to have.
- The borrower may ask for more money - If the borrower is a family member or close friend, they may feel more comfortable to ask for more money, however, by providing more money, the further into a rabbit hole you are going. Others may feel like you are someone they can come to whenever they need additional funds. This puts you in an even greater predicament explaining why you made the initial loan to them, but will not give them any more money. The solution may be not to loan any money at all. If you do wish to make a loan then we would suggest that you protect yourself as much as possible.
It is important to record the loan in writing and state the fact that it is not ‘a gift’ you can set out the exact amount to be paid back and how it is to be paid back. That way you will all be clear if a payment term has been breached or missed. You can also state there will be a penalty if the agreement is not complied with.
Consider forms of security for the loan?
It might be wise to consider forms of security for your loan for further protection. That way if there is a default you know you have an asset that you can claim against. For example, a charge on a property.
How can I make re-payments of the loan traceable?
Make a payment of the loan by bank transfer or cheque. On the bank transfer itself, you may wish to state within the reference ‘loan’. Receive all payments back by bank transfer and not cash. You should keep a written record of all payments that each party signs when each repayment is made.
Disputes and disagreements occur in everyday life; often when you least expect them. Our dedicated team will help you get matters into perspective and find the most timely and cost-effective solution. Our team are located at our Railway Court office in Doncaster but can arrange to see you at either of our offices in Doncaster or Sheffield. We can assist with drafting loan agreements and advising you on the best way to protect the money that you are owed.