Thinking About Lending Money to Family or Friends?

Thinking About Lending Money to Family or Friends? Read This First…

Some will say that family, friends and business shouldn’t mix, and that there’s too great a risk for something to fail and for it to cause permanent damage to a relationship. The same is also often said when it comes to lending cash to family and friends. Of course, it’s often easier said than done. After all, it’s only natural to want to help out someone in need, especially if that someone is close to you. There's likely a time in our lives where we've all needed to borrow money from someone in our social or family circle.

So, if you’re thinking about letting friends or family borrow money, or indeed you'll be the one doing the lending, and they really don’t have any other option, here’s our advice on how to go about it.

1. Only deal with cash, and what you can afford

Avoid signing your name on behalf of anyone else for any kind of credit. Stick with cash only, as it can be controlled, and of course it goes without saying that you shouldn’t offer more than you can afford. For example, if you’re looking at lending R5000, but it’s going to leave you tight, then rather offer a smaller amount. This also makes sense if there’s a chance you’re not going to get your money back any time soon.

2. Keep the transaction business-like

Agree on how much money they're going to borrow, as well as how and when you’ll start getting your money back. Then write it down and make sure you both sign it, so it’s a binding agreement (even if it’s just between the two of you). By keeping the transaction strictly business, the person you’re lending to is less likely to default on their repayments to you, and there’s little room for any miscommunication or confusion between you.

3. Find out what they need the money for

This might seem too nosey, and many people would rather not know what the borrowed money is for. Having said that, there are going to be things you’re happier to help with – for example a deposit on a car or a home, and things you’re not so aligned on, like financing a month long holiday for a family member or friend who isn’t even working at the moment. Remember, a registered credit provider would never blindly hand over funds, and neither should you.

Financial advice aside, as we said in the beginning, sometimes relationships trump money sense. So if you are going to lend money, just be sure to use your head, rather than your heart.

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