Lending money to a friend or family member is risky business. Although you don’t want to see them suffer, there’s always a possibility that you may not get your money back. As a result, it may put a strain on your relationship. According to LendingTree, 41% of Americans have lent money to a loved one within the past year and twenty-seven percent regretted their decision. If someone close to you asks for a loan, keep the following tips in mind.
Consider the person’s reputation
There’s a big difference between someone who has temporarily fallen on hard times and someone who was never good with money to begin with. If the person asking already has a reputation for being financially irresponsible, don’t even waste your time. Once the money leaves your pocket, you’ll never see it again. Only lend money to people you know you can trust.
Don’t lend more than you can afford
Be realistic about the amount you can afford to lend. You don’t want to give the person a large sum of cash, then be struggling to pay your own bills. Plus, there’s always a possibility that you may not get your money back. So don’t give them more than you can afford to lose.
Get the agreement in writing
The best way to avoid any confusion and future headaches is to get everything in writing. Make it crystal clear that this is a loan, not a gift. Write down your names, the date, loan amount, expected monthly payments, when they’re expected to start repaying the loan and the due date. Be as detailed as possible. If you plan to charge interest, include that in your agreement as well. Be sure to include consequences for nonpayment so everyone is on the same page. Once they start making payments, keep a log of how much they paid, the date and the remaining balance.
Don’t be scared to say no
Don’t let anyone pressure you into doing anything you aren’t comfortable with. You aren’t obligated to fix anyone else’s mess. If your gut says no, then listen to your inner voice. Tell your loved one “NO” and be firm with your decision. Don’t offer an explanation because then they’ll try to find a way to change your mind.
Never cosign a loan
If someone asks you to cosign a loan for them, hopefully alarm bells go off in your head. People only need a cosigner when they can’t get approved for a loan on their own. Commonly, it’s because they either have no credit or a bad credit score. In any case, it’s best to say no. As a cosigner, you’ll be 100% responsible if they decide to stop paying their loan. Your credit also suffers if they start skipping payments or paying late. To make matters worse, you won’t be able to take your name off the loan. The debt will be stuck with you for as long as it’s owed.