Money, more often than not, comes in-between relationships and it can be difficult to say ‘no’ to a loved one or someone important to you. However, if you explain to them the reasons for saying ‘no’ and they genuinely care for you, they should understand and respect your decision.
Having said this, if you find yourself in a position of planning to lend money to someone close to you, here are 7 golden rules that can help:
Rule No. 1. Never lend money that you’re not prepared to lose.
If you feel unsure or anxious about it, don’t do it. It’s always best to go with your gut instincts and make the decision that you feel comfortable with. Be ok with saying ‘no’ and explain the reasons (apart from the lingering feeling that they might not pay you back) in a way that they can accept and understand.
Rule No. 2. Work out how it will affect your financial situation.
Make sure lending this money out to them will not cause you to be out of pocket or impact you further down the track. Do you have a monthly mortgage to pay? Are you expecting another child? Do you need the money for retirement? Is there a large expense coming up? Check your financial situation first and make sure you’ll be ok without this sum of money.
Plan to the best of your ability, but remember we can’t always foresee future expenses that may prop up so always leave some funds in your savings in case an emergency comes up. You don’t want to end up in a situation where you need to ask them for the money back sooner than they can pay it and cause things to turn sour, so planning ahead as much as possible is important.
Rule No. 3. Ask what the money is for.
You need to be careful you’re not enabling them to continue bad behaviours associated with money. Ask them exactly what the money is for and say ‘no’ if lending this money will fuel excess spending, poor money management or bad habits. Don’t be afraid to ask, after-all you should be entitled to know where your money is going.
Rule No. 4. Consider the impact on your relationship.
“Neither a borrower nor a lender be. For loan oft loses both itself and friend.” Spoken by Polonius, a counsellor from Shakespeare’s Hamlet, these wise words are a testament to the woes of lending money to friends.
Consider also the possibility of saying ‘yes’ once and having them back as a repeat offender, or worse, leaving the door open to more friends or family members asking to borrow money and then having to say no to them.
Rule No. 5. Sign a written agreement.
Discuss terms and then sign a written agreement with them. Things can go wrong when you just talk about it and lend on good faith.
Your written agreement should state as a minimum:
- The amount of the loan
- The loan repayment date
- How the loan will be repaid (frequency and amount, or lump sum)
- Method of payment
- Interest (if any on the loan)
The more information it can include, the less the chances of a disagreement occurring later. It is well worthwhile getting legal advice to help draft the document for you.
Rule No. 6. Treat the loan as an Arm’s Length Arrangement.
It’s your money and you deserve to be treated like any other lender. Agree to a repayment timeframe, agree to repayment dates and amounts and ensure your terms are met.
Banks don’t let a few months slide by without repayments because it’s Christmas holidays or change of employment etc. and neither should you. Making this a habit early on also helps display to the borrower that you treat they money you have loaned with care and attention.
Rule No. 7. Seek other ways of helping them.
Money sometimes isn’t the only option. Think about other ways of assisting them; like helping them find another job, babysitting or looking after their pets, etc. This might actually turn out to be more rewarding for them and will help strengthen your relationship.
Sometimes loving someone involves doing something they don’t want but is in their best interests. If you do decide to loan them the money, make sure you communicate openly and honestly with them to avoid bitter disagreements in the future.
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Disclaimer: This post has been prepared for general information purposes only. It is not specific advice to any particular person. You should consult an authorised Align Financial adviser before making financial decisions. Align Financial | Financial Planner Northern Beaches | Servicing North Narrabeen, Narrabeen, Mona Vale, Elanora Heights, Newport, Avalon, Palm Beach | Enquire with us online.