5 Tips for Lending Money to Friends and Family
Lending money to a friend or a family member can be quite tricky, as financial entanglements can often strain relationships.
Here are five tips for lending money to friends and family that can help make the process smoother and more professional, and minimize your risk of losing the funds you are lending.
1. Lending What You Can Afford to Lose
In general, common wisdom teaches us that we should only ever lend money that we can afford to lose, and it’s wise to apply this even if your sibling or friend asks to borrow money from you. The thing is, there may be no guarantee you’ll ever see those funds again, so only consider giving the amount you are fully comfortable with potentially losing.
2. Get It in Writing
The golden rule to lending money is getting it in writing – even if it’s your parent or your childhood best friend whom you completely trust.
Asking the borrower to sign a promissory note is not rude or inappropriate, although it may be viewed as such in certain cultures. Overall, if the person intends to pay you back, he or she should not be offended and will readily agree.
The promissory note can even be written out by hand, as long as the information is clearly stated and both parties sign and date it. Having it notarized may be a good idea – not only does this show you’re serious about being repaid, but can also protect you later on if things get complicated; and, unfortunately, they sometimes do.
3. Be Specific About Repayment Terms
To protect your investment and your relationship, it’s essential to put the terms in writing and make sure all involved parties have a clear understanding of the agreement – otherwise, the lack of clarity may lead to many problems later.
Rather than: “As soon as possible”, “When you get a job”, etc., specify the desired terms. The key items to cover in writing are:
- The amount of money you’re lending
- A repayment schedule (whether the term is a single lump sum in full, or a payment plan in increments)
- The interest rate charged, if any
- An agreement on what happens if the person does not repay within the allotted timeframe
- Whether the note is secured by any assets
4. Get a Lawyer
It’s one thing to loan $100 to a friend or sibling until payday. However, if it involves lending a significant amount of money, protect yourself by talking to a lawyer.
Involving a lawyer from the beginning has many benefits: you can remove some of the guesswork, be sure that the written agreement/promissory note is legally binding, and ensure you have a fair intermediary.
Your friend or family member may disagree with part of the note or view it as unfair – and having a lawyer and explaining how you only feel comfortable following a professional recommendation can make a big difference. Your lawyer can also assist with implementing the terms of the note more effectively and even with the collection of the repayment.
5. Integrity
Keeping communication lines open is crucial – whether it’s about setting the terms or perhaps needing to change them if difficulties arise; whatever it is, it needs to be clearly and timely communicated by both parties.
Follow through with whatever consequences of a late or missing payment were determined beforehand – they must be clear in advance, and you should be prepared to enforce them. The experience has, unfortunately, shown that one of the biggest concerns with lending money to friends and family is being taken advantage of; it’s often assumed that because you are a friend or family member, you will not mind a late or missed payment.
Also, if you have loaned money to different people, don’t be afraid to treat each situation and each person differently – the repayment obligations may vary, just make sure you are clear and in integrity with everyone.
And perhaps the most important part is that if you are unsure about lending the money, avoid doing it just because you feel guilty or because you want to help – always follow your instincts.
Lending money for something superficial or nonessential, even if it’s to a friend or family member, may not be aligned with your values, especially if you don’t have a lot of extra cash to just throw around. Knowing what the money is for can help you determine if you will give the funds in the first place – after all, what someone views as a good reason for borrowing money may not be acceptable to you.
If you do decide to loan the money, be prepared financially to lose the money.
Again, you shouldn’t lend money you aren’t willing to lose. Promissory paperwork notwithstanding, are you really prepared to take a sibling or a friend to court?
At Levin Law Group, our proficient corporate and business lawyers are well equipped to assist you with business laws and customs and provide support with legal challenges when planning, structuring, and conducting business transactions within a wide range of industries, a crucial aspect of any successful business.
The Levin Law Group’s experienced, competent business law firm can assist individuals and business entities in a broad spectrum of business transactions throughout New York State.
Take steps today to ensure your rights and interests are protected.
Take steps today to have a piece of mind from day one of the intricate process of starting a business, make sure your legal bases are covered, and your rights and interests are protected – contact our New York and New Jersey business law attorneys today.
