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Before Lending Money to a Loved One, Read This First

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When it comes to money issues, the last thing we want is to let a trivial thing such as money affect our personal relationships. Sometimes the act of lending money and the failure to repay can lead to legal consequences or even a lawsuit. This is why most people turn to a trust attorney when it comes to wealth preservation and asset protection.

If you end up in a situation where a friend or a relative asks for money, what would you do? In this article, we’ll talk about how to lend money to a loved one without letting it affect your relationships.

Lend the amount you’re willing to lose

At some point in our lives, we have experienced helping a friend or family member by lending them money while expecting to get paid in return. In these situations, you either get paid or lose the money you lent, or face a relationship fallout.

While banks require applications and background checks to determine the client’s creditworthiness, most of us don’t subject our friends to a credit score test when they borrow money.

Before we lend people money, we usually have a background of the borrower’s spending habits. If they are notorious for spending money on life’s luxuries or have a bad record for not paying debts, don’t feel guilty about rejecting them, especially if that person will only harm your financial security. If you want to help them but are unsure they will pay back, lend them the amount you’re willing to lose are treat it as a gift instead.

Give yourself time to think

You have no obligation to give in whenever a close family member borrows your money, regardless of how dire their situation appears. Tell them about your willingness to help but ask them to give you more time to think about what works best for your financial situation. The key is to pause and think before answering.

Giving yourself a few minutes to think will help you formulate follow-up questions. Investigate the situation by asking the amount they need, the reason behind it, and their future financial expectations. As the borrower, you have the right to know where your money is going, especially if it’s a hefty sum.

Most financial experts will advise putting the agreement in writing to protect both parties. But keep in mind that written agreements may not provide much protection when it comes to enforceability. In times of disputes, the lender may feel guilty about the idea of taking their friend or relative to court because they fail to pay their debt.

The best option is to set a repayment schedule instead of drafting a written agreement. Ask them to provide you with a payment schedule of how they plan to pay you back. The payment schedule should include the interest, agreed-upon deadline, and payment amount in installments, whether weekly, monthly, or quarterly.

It’s important to help them decide on this part because it’s hard to set your expectations alone when setting the deadline for the payment. Chances are, you’ll end up disappointed if they can’t return the money on your desired term. This way, you don’t have to chase them for repayment, something that may feel uncomfortable for both sides.

Think whether to charge with interest

If you plan to charge the borrower with interest, think about how it could affect the relationship and the chances of getting repaid. Sometimes, charging with interest comes with a certain risk since it might look like you’re trying to profit from someone else’s financial difficulties.

If you want to lend money, you need to have a clear intention of wanting to help instead of using it as an opportunity to earn cash yourself.

Consider it as a gift

It may sound a bit risky, but you may want to offer the money as a gift instead of a loan. This option is not for everyone, but it can be a great way of protecting the relationship.

Treating the borrowed money as a loan would only add to your financial burden. If you want to save yourself from the potential resentment, it’s best to move on and free yourself from that headache. The best part is you get to help a friend without forcing them to repay the money. The choice usually depends on the borrower. They may refuse to repay it or pay the money back to prevent causing unnecessary rifts in the relationship.

When a friend or a loved one asks for help from a place of despair, you want to do everything to extend your assistance. But if it will only ruin the relationship in the process, don’t even consider it. In the end, there are still many ways to help aside from lending money in a manner that won’t affect your financial status.

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