How to lend friends and family money without falling out

With the cost of living rising, childcare costs soaring, and salaries not rising at the same speed, families everywhere are feeling the pinch.

So, it’s not uncommon that requests for “loans” to start coming more often from friends and relatives. If you’re the generous type who isn’t bothered about whether the money comes back or not, then lucky you! But if you don’t have a money tree growing in your back garden, here are some tips on how to loan money to a relative of friend:

Find out why they need the loan

Without acting like a police officer or a judge, you should ask your friend or relative why they want the loan, and how they intend to pay it back.

This is important because you may find that while they have a good reason for needing the loan, they may not really be able to pay you back the money in time for when you may need it – or at all! These details will, therefore, help you decide on whether you should give the loan or not.

Is it worth risking your relationship if it all goes wrong?

We’ve all heard a story about how friends or family fell out because of money. If you are worried about this, then you need to consider whether you should be lending the money at all – and explain this to the person asking. Have they borrowed money from you before? If so, have they paid it back as agreed, or have you had to chase them for it? What would you feel like if they didn’t pay you back the money – would that destroy your relationship? Is giving the loan worth risking breaking a relationship?

Can you afford to ‘lose’ the money?

No matter how good the reason is, you must know that there is always a good chance that you will not get the money you have loaned to your friend or relative back. This might not be a big issue if it is a small amount of money, but if it is your emergency fund, or money you need to pay a bill, will you be able to cope financially if you don’t get the money back in time or at all?

Make a record of the money you lend

Once you have agreed to give the loan, you must write down the date you gave it, the amount of money give and the purpose of the loan then you must both sign it. That way, if there is a disagreement or any confusion later on, you have a record of it. Make sure you both have a copy of the signed agreement.

Finalise payment terms

People will say anything, and dramatise their situation to get their hands on some money. But once you’ve given it, you’d be amazed at how relaxed they can become about paying you back your loan. This is why you need to have a firm agreement in place about how the money will be paid back to you.

Will they give you the cash, or send you the money by an online money transfer? If possible, you can ask them to write you a cheque for the date they promised to pay you back, and write down the cheque guarantee number. This does not guarantee that you’ll be paid, of course, but it does threaten bank charges if you present the cheque on or after that date and they have not made provisions for it.

There is a chance that you may not have the money available to give the loan in the first place – you may be really tight yourself, and looking for a loan, too! If that’s the case, it’s worth speaking to your bank and arranging to go through your spending patterns with a personal adviser. If you know about your finances and just need the money for a purchase, or to consolidate your depts., there are some good loans on the market.