How To Lend And Borrow From Friends And Family

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how to lend and borrow from loved onesWe all know that times are tough, but it really strikes home when one of our loved ones asks us for financial help–or when we need to ask. It’s incredibly difficult to navigate the proper money etiquette if you’re looking to borrow or lend. As Shakespeare said, “Neither a borrower nor a lender be; For loan oft loses both itself and friend.” If your sister lost her job; is it your responsibility to step in? If your best friend has trouble paying rent, is it smart to help her out?

And then, there’s you. You’re a financially-responsible adult, but sometimes you’re simply in a bind. What’s the best way to ask for money, and what do you do when there are strings attached? The most important thing is to borrow and lend in a way that doesn’t ruin your relationships. Here’s how:

LearnVest Rules For Lending:

1. Go In With Your Eyes Open.

A recent CNN Money survey showed that 43% of people who made a personal loan weren’t paid back in full; 27% had not gotten any of the money back. It’s very possible that you won’t see this money again, either.You need to be prepared for that.

2. Know Your Motivation.

Are you are hoping for some sort of emotional recompense in addition to being paid back? Do you want your recipient to feel grateful—or even guilty? Does a part of you like having a financial edge so you can feel better about yourself in comparison? Try to think about any subconscious agendas in advance so things don’t get sticky down the road.

3. Be Willing To Say No.

What if you choose not to lend money, even if you can afford to? Family psychologist Dr. Brad Sachs suggests that you must be honest and clear. Try something like, “I’m afraid that loaning this money would eventually create more problems than it would solve, and I’m concerned that the longer-term implications would outweigh the short-term relief. I’d be happy to talk with you more about the reasoning behind my decision, if that would help.” You can choose to support your loved ones in non-financial ways, as well, by doing things like passing on a resume to another friend who is hiring, reading a business plan, reviewing grad school papers, or just being a sympathetic ear.

LearnVest Rules For Borrowing:

1. Be Clear About Your Needs.

To show people that you have your act together and plan to use the money they give you responsibly, outline your goals, financial plan, and budget, says Lauren Gray, a licensed marriage and family therapist in Washington state. It’ll also provide a good jumping off point for a frank conversation.

2. Understand Your Own Money Issues.

Be clear with yourself, too, says Dr. Sachs. Does asking for a loan make you feel guilty or inadequate? Will this loan promote your capacity to become self-reliant or induce further dependence? We’ve all got money baggage; we just need to sort it out before we borrow.

3. Talk Terms Of The Deal.

Is this a loan or a gift? If it’s a loan, is there interest? (Note that if more than $13,000 is passing hands, you need to be careful not to run afoul of the IRS.) What’s the timeframe for repayment? Are both sides perfectly clear about how the money will be spent? According to Gray, if expectations are spelled out explicitly, the chances for success increase dramatically. Consider drawing up a formal agreement to outline the terms of the loan. The goal here isn’t to make either party feel bad, but to set clear expectations and protect yourselves if something goes amiss.

4. Are There Strings Attached?

No matter how much your lenders love and respect you, some may feel that they have a right to tell you how to spend your money (or even your life) after they give you a loan. “Typically, a loan strains a personal relationship,” says Kevin Zulch, an accountant with a practice in Red Hook, NY. In fact, he advises his own clients to try other avenues before turning to friends and family.

Prepare to prove Shakespeare wrong: It’s possible for a loan to keep both itself and friend.

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  • Cindy

    I borrowed $500.00 from my niece and I gave her four post dated checks to pay her back, but I had to ask her for more time to pay it back. She has been good about it, but what if I still don’t have it yet? What is the proper edicate in handling this issue?

    • http://twitter.com/amkade Allison Kade

      Hi Cindy,nnThat’s a great question, and maybe fodder for a future post! I’m glad that your niece has been understanding about the whole situation. I think that at this point, you may need to ask yourself honestly: nnHow much longer will it take you to make that money to pay her back? nnWhat else can you do to make back that money? By accepting a loan, you’ve made a commitment to paying her back. Forget for a moment that she’s your relative and instead pretend that she’s a bank manager that isn’t quite as nice. What are the maybe-less-than-pleasant things you could do to just force yourself to make it work? Does that mean babysitting on the weekends? Skipping all restaurants and going out for a while until you’ve made back that money? nnAlthough this is 100% your responsibility to pay her back, it’s great that she’s been so nice about it. Off the cuff, my suggestion would be to first come up with a full-on plan by yourself. Saying, “Hey, I need some more time but I’m not sure how much” may sound kind of vague for her as a lender, and may give the impression that you aren’t quite as committed to paying her back. nnSo, sit down, figure out exactly what you can do to make back that money, and come up with a time estimate. Even if you take her up on that loan extension, imagine the difference it would make to hear a more specific answer like, “I’m sorry that I need more time, and thank you for giving it to me. I am planning to work extra shifts at my job and babysit on the weekends to make the extra cash to pay you back. I estimate that, by doing so, I’ll be able to bring in an extra $75 [[or however much]] per week. Taking into account the amount I’ve already saved up to pay you back, it should take me about a month [[or however long]] to pay you back, given these new things I’m going to do to get there.”nnGiving her a time frame (and sticking to it) should make a big difference in her confidence that she will, in fact, see that money again someday.nnHope that helps!nnAllisonnEditor @ LVnn