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Tips on Lending Money to Family and Friends, Part 2

Following up on the posting earlier today, we wanted to offer still more tips on avoiding trouble when lending money to friends and/or family.

  • Don’t be an enabler. If the borrower is engaged in a destructive lifestyle, and is habitually in financial hot water, be emotionally supportive but not financially supportive.  A better use of your money would be to pay for professional counseling to get to the root of the problem, since bailing them out of their current crisis won’t address any underlying issues.

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  • Treat the loan as a business arrangement. After all, you’ve now become the banker, and bankers take things seriously. Once you have agreed on the amount of the loan, discuss the interest rate, term, payment due date, and late fees. To figure out monthly payments, including interest, consider using a loan calculator, such as the one available at www.bankrate.com

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  • Put all the terms of the loan in writing. Many Web sites offer free promissory note forms. One such site is Internet Legal Research Group, where you can find promissory note forms for each state. Consider having the documents notarized, as this will give you more legal standing if the borrower defaults. While putting it in writing is smart because it makes the borrower more accountable, be aware that it won’t guarantee you will be repaid. It’s simply another layer of protection.Â

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  • Be forthcoming about any legal steps you will take to collect an unpaid loan. Jointly reviewing a worst-case scenario in advance of the situation can go a long way to preserve a relationship if things start going south.

For more tips on lending money to friends and family and a whole host of other topics, visit the Consumer Tips section of the NFCC Web site by clicking here.

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