Money has a very unique way of spoiling relationships. Because money can be spent in so many different ways and according to different philosophies, money often leads to arguments between family members and friends. So what to do when your teenage nephew or less-than-motivated high school buddy approaches you for a loan? While there isn’t exactly a clear-cut answer to this question, there are some guidelines to be followed when considering a personal loan:
Check Yourself. The very first thing you should do when a family member or friend asks you for a loan is to look in the mirror. Consider your financial situation and whether or not you will be able to survive without the money you’re going to lend. In other words, be sure you consider your personal finances first.
Be Nosey. Be sure to ask the obvious question, “For what?” before you proceed any further. When in a financial squeeze, people make irresponsible decisions or pursue loans they can never pay back. As the lender, it is your responsibility to ask how the money will be used so that you can determine whether it’s a legitimate need.
Go Formal. It’s extremely important that both parties address key aspects of the loan such as the size, interest rate, when payments must be made and how they will be made. This information should be documented and signed as a formal agreement to avoid disagreements in the future, no matter how close you are with the borrower.
Get Legal. Oddly enough, the lender can actually be taxed if an interest rate isn’t assigned to the loan. While small loans will typically fall under the radar, it’s a good idea to seek the advice of a CPA (certified public accountant) to make sure that come April 15th, you aren’t stuck with a hefty tax you didn’t expect.
While lending money to family or friends isn’t everyone’s cup of tea, it works in many cultures and is, in fact, one of the only ways for people in developing countries to pull themselves out of poverty. So if you decide to lend money to a friend or family member, be sure to consider the advice above in order to avoid future feuds.