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The pitfalls of lending money to friends and family

  • Troy M. Hoffman
  • September 7, 2021
  • Lending money



The pitfalls of lending money to friends and family



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Lend what you can’t afford to lose

Perhaps the # 1 golden rule when considering loaning money to friends and family is to first ask yourself: can you afford to provide the money as if you gave it forever? “If the answer is no, then you can’t afford to be a philanthropic,” Mark Charnet, Founder and CEO of American Prosperity Group. “If the answer is yes, then you must delve into the request based on the person’s history, personality and reliability.”

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Do not write a contract

Those who decide to proceed with such a loan should not do so without developing specific parameters in writing. “A contract should be written for clarity … and to avoid misunderstandings,” says Charnet, who adds that all parties involved must sign the contract. “For example, if you lend money to your brother, your sister-in-law must also sign the contract.”

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Omit key details

Another word on how to write this contract: you need to be specific, spell out the exact amount of the repayment installments, when the payments need to be made (monthly, weekly, quarterly), and when the repayment begins and ends, says Jully. -Alma Taveras, founder of Investing Latina. “Being able to help a family member during difficult times is a great privilege, but it is very important that you set very clear expectations,” says Taveras. “Sometimes people say yes – which can be very easy – but don’t address the hard part, which is saying what is and is not acceptable. “

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Agree with late payments

Remember that the loan you give to a friend or family member is a business deal and you should treat it as such. “If you accept that the loan repayment is due every other Saturday and the friend or family member pays you on Sunday, don’t let it go,” says Taveras, who suggests making it a point to discuss. late payment. “Remember you want to treat this as a real business transaction.”

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Make the borrower feel guilty

Here’s another no-no when a friend or family member asks you for a loan: reprimand the borrower for the situation that put them in financial trouble in the first place. It won’t do anything positive, and I hope the person has since learned from the situation. “Asking for financial support from a family member can be a lesson in humility, and the borrower is not looking to be berated for creating the situation, but just helped out,” Charnet said.

Related: How Money Problems Can Affect Your Mental Health

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Neglecting to find out why they need the money

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Don’t set realistic expectations

Keep in mind that we are still in the middle of a pandemic and there is no way of knowing how long the person you are giving the money to may have to pay it back. “It’s important to remember that we don’t have an end date, and we have no clear idea of ​​how the economy might continue to be affected if we face further bottlenecks and distancing. social continues, ”said Ethan Taub, founder and CEO of Bill. Billry management platform.

Related: 21 Ways To Lower Your Monthly Bills When Money Is Tight

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Not being prepared for your own financial emergency

It should already be clear that these are uncertain times. While your own financial situation may seem strong enough, things can change in no time. So lending money from your own nest egg may not be the wisest decision. “You can’t guarantee your own financial security, so needing that money can get pretty desperate, pretty quickly,” says Taub. “These types of possibilities, which generally seem unlikely, are now very real and could tear families and friends apart.”

Related: How to protect yourself from financial ruin in retirement

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Lend more money than you really should

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View your own income

It is not a good idea to brag about your income to friends or family, especially when applying for a loan. “If you don’t talk about your income and finances, it will be easier to say no to a family member because they won’t see you as a greedy person,” says Leif Kristjansen, personal finance expert, pre-retired and creator of the Five Year FIRE Escape website.

Related: 22 ways to show support for someone who has lost their job

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Make a judgment on spending habits during reimbursement

There could very well come a time when the person you’re loaning money to misses or skips a payment (or two). Be ready. “When payments are missed, the lender starts to be very critical of how the borrower is spending their money, thinking, he can’t pay me back, but he can go out to dinner? Get your nails done? Throwing a party? “Says Michael Hess, Wealth Management Advisor at WestPac Wealth Partners.” After observing how the money is spent, the lender may start to think, ‘Do they even care about me? pay it back? “And then the elephant in the room is even bigger. The bottom line is that lending money to friends and family is a sticky situation. If you want to help someone financially, be sure be prepared for what to expect and the likelihood of a slow repayment, as people who borrow from family and friends usually don’t take these loans as seriously as a bank loan.

Related: 26 tactics to get out of debt

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Feel the tension at family events or social gatherings

It is important to separate your personal and professional relationships with the borrower, although this can be easier said than done. “Make sure you take time away from family functions to discuss the loan,” Taveras says. “Give yourself the grace to spend time with family without raising money and feeling stressful. The more consistent you can become in separating the two things, the less strain you will feel over the long term and over the life of the loan. “

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Neglecting to involve a legal professional

Seeking legal advice and advice can help avoid arguments when lending money. While “you might want things to stay as friendly and informal as possible,” says Holly Andrews, Managing Director of KIS Finance, “dealing with things more professionally will help keep the arguments at bay. And if things don’t go as planned, then you will have legal backup. ”

Related: Bankruptcy: when is it an option?

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Forgetting to write off a loss

In the very real event that a friend or family member never pays you back, be sure to at least report your loss. “Don’t make the mistake of not writing off your tax debt,” Taveras says. “Non-business bad debt, like a loan to a friend or family member, can be deducted from your taxes using the 8949 short-term capital loss form. get your loan back, at least make sure you get it by writing it down. as a loss and reduce your tax liability.

Related: 9 common tax mistakes retirees make

Microsoft and its partners may be compensated if you purchase something through the links recommended in this article.

Feel obligated to help

One final tip, from American Prosperity Group Charnet: You can say no to applying for a loan. Sometimes that can be a better option than the possibility of broken relationships, grudges, or weeks, months, and years repeatedly asking a loved one for money.

Related: What to do when a family member becomes a stranger

Microsoft and its partners may be compensated if you purchase something through the links recommended in this article.

16/16 SLIDES

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