Five rules to follow when lending money to your family

Lending to friends and family is an emotional decision, and that’s why it can be tricky. We’ve spoken to financial planners to learn from their own experiences as well as those of their clients to spell out five rules that can make sure you strike the right balance and don’t impact your own finances on top of that.

assess your finances and the borrower

With the downturn in the economy, cases of people asking friends and family for loans are on the rise, according to financial planners. “Our clients receive inquiries from people who have lost their jobs or whose wages are delayed, or from companies that are in dire straits,” said Malhar Majumder, Kolkata-based financial planner and partner, Positive Vibes Consulting and Advisory .

While it can be difficult to refuse to lend to a loved one, especially if the person is well qualified and has only recently encountered difficult circumstances, remember that lending to a friend or family member is a matter of money you can afford to lose. So make sure you have enough disposable income for you to lend and don’t worry about cutting an impending expense or missing the next SIP. “It can be the money you have kept aside to buy something for yourself or for your home, which can be postponed for a few months, or money available for other discretionary spending,” said Majumder.

Also, only help your friends or relatives if you can trust them completely. A friend of Calcutta-based businessman Kaushik Roy, 49, borrowed money from him under the pretext of a medical emergency and never repaid the loan. “I got to know him through work. He was smart, witty, and likeable and had earned my trust. He told me his mother needed medical attention and I lent him ??15,000, ”Roy said. He later learned that this friend was selling the story of the disease to borrow money because he was about to quit his job and move to another city. Roy never heard from the friend again, but the incident turned into a Lesson for Life for him, and he decided to never step out of his comfort zone to do anyone a financial favor again. .

Hands off your investments

Often times, clients are convinced of the idea of ​​lending, but ask for advice on how to go about it. Typically, financial planners advise them to refrain from lending if they do not have money available.

“We show them through calculations how taking away from their important life goals can impact their future. They could put their retirement or their children’s future on the line to help someone today, ”said Majumder.

If you absolutely have to help and you don’t have any money set aside, have a loan threshold. If you need to dip into your emergency funds, it is better to dip into the savings parked in your bank account rather than liquidating the investments made in term deposits or debt funds. Also, don’t forget that given the current situation, the threat of job or business loss is very real.

Learn to say no even to your loved ones

As uncomfortable as it can be for you, it is essential to toughen up and say no to a loved one under certain circumstances.

For starters, if you think you don’t have enough disposable income and savings, or your work or work situation is unstable, don’t lend.

Then make sure you only lend in an emergency. So if someone asks for money to finance a lifestyle need such as buying a car or even paying for credit card dues, which usually increase when the person is unable to manage properly his finances, you must not give in.

You can also avoid loaning the same person a second time. “Helping someone once is good. If he needs money again, there may be a problem with the way he is managing his finances. Better not to lend twice, ”said Arnav Pandya, a Mumbai-based financial planner.

Lenders can politely decline, saying they have other financial commitments, suggested Pandya, who does not believe in lending or borrowing money from friends or relatives. “Once you turn down a few people, the word gets around. Others learn you won’t lend, ”he added.

Don’t hesitate to request a refund

Typically, borrowers keep loans from family and friends on the repayment priority list, hoping they would understand that it would take time to get finances back on track. It is also not given importance because it is usually interest free and has no repayment schedule.

If you had a certain deadline in mind at the time of the loan, do not hesitate to ask for a repayment. That’s why it’s important to talk about repayment early on when you lend. Only lend if you are comfortable with the deadline, and once the deadline is over, don’t hesitate to remind the borrower.

Whenever friends borrow from Mumbai-based software developer Chetan Tandel, he email them the amount to document the loan. The 35-year-old subtly tells his friends he’s forgetful, and the email is only for his records. “Often, friends forget small amounts. They might be intending to pay it back, but after a few months it gets out of hand, especially if the loan amount is small. Documentation via email has always been helpful, ”Tandel said.

Also be honest about your financial situation. Someone close to you would understand and might not take things for granted.

Never become a loan guarantor

You can choose to encourage your loved one to take out a loan and become a guarantor of the loan yourself. While the loan has its dangers, becoming a guarantor can also pose problems.

Chandan Singh, 45, now works as a financial planner in Pune. But ten years ago, he was employed at a financial services company when a friend close to the office asked him for a loan. Singh didn’t have enough money, so he took out a bank loan for his friend and became a surety. After a few months, the friend quit his job and also stopped repaying the loan, and the lender started sending notices to Singh. Initially, Singh did not take this seriously, but eventually realized that the bank could initiate collection proceedings against him. He started looking for the friend but couldn’t find him. For a ??50,000 loans, Singh ended up paying ??1 lakh, including interest and penalties, over four years.

Seeing friends and family in financial difficulty can be overwhelming. But before you help someone else, make sure you are financially healthy. Learn to be honest about your financial situation with those around you, and remember that you don’t have to lend just because you can. Every time you make money available, you let someone take you for granted. If you’re still willing to lend, mentally prepare yourself so that the money doesn’t come back to you.

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Troy M. Hoffman