Use logic. Do not say “yes” because you feel obligated, guilty, or just want to help. Try to look at the situation realistically and act sensibly.
Treat the loan as a business arrangement. If you have taken the time and put in the effort to prepare your loan as a legal transaction, both parties should be expected to treat it as such. You are the lender and your friend or loved one is the borrower. Maintain your roles and there will be fewer “gray areas” that might result in confusion or uncertainty.
Check into legal/tax issues. The IRS has specific criteria concerning loans and monetary gifts. You may be surprised to find out that a loan with a low interest rate might actually be considered a gift rather than a loan by the IRS, which means a gift tax may be required.
Put it in writing. Establish a legal record of the transaction by spelling out all the details of the loan in a written document, which is often referred to as a “promissory note.” Include all the terms and conditions of the loan. The document should be signed by both parties. You may also want to have the document notarized. Free promissory note forms are available online.
Define the transaction. Are you making a financial loan with specific terms or are you providing a monetary gift that may or may not be paid back? If it is a loan, make sure everyone understands exactly what that means. Both parties should be in agreement about the details involved, such as the amount of the loan, when payments will be made, how payments will be made, the consequences of missing a payment, etc. Be sure to set reasonable and attainable repayment terms that work well for both parties.
If you really care about someone and they ask you for something, your first inclination may be to say “yes” without much thought. But, when someone you care about asks you for a financial loan, it is a good idea to take some time to think it over before you answer.
People loan money to family and friends all the time, but doing so can become a bit tricky. Lending money to someone you care about might be an uncomplicated, completely trouble-free experience. However, lending money to a friend or loved one might also lead to turmoil and conflict.
Loaning money is always a gamble... even when dealing with someone you love and trust implicitly. When you lend money to anyone, it is impossible to know for certain whether or not you will actually see the money again. So never, ever lend money you are not prepared to lose… and never, ever make a loan that puts your own financial security in jeopardy.
If you are thinking about lending money to a close friend or family member, you may find the following suggestions helpful. This information should NOT replace the advice of a financial expert. ALWAYS consult a trusted economic advisor.
Keep the lines of communication open. If you provide a loan to someone, it is vital to stay in contact with that person. There will be far fewer opportunities for conflict to arise if you are able to talk through any issues that may come up as they happen. You may want to check in with each other regularly to touch base and make sure you continue to be “on the same page.”