Rules You Must Follow when Lending Money

Some things that are easier said than done-one of them is giving the advice to steer clear of lending to your friends or family. Though it is advisable to stay away from lending to friends and family, but sometimes finds it hard to say no to own relatives or loved ones when it comes to monetary assistance. More often than not, it’s difficult not to help when you see a friend or family member in financial stress.

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Lending to friends and family is an emotional decision, and that’s why it can be tricky. Here are provided few rules that can ensure you strike the right balance and don’t affect your own finances in the bargain.

Assess your finances and the borrower 

It may be difficult to refuse lending to a loved one, especially if the person is well-qualified and has only recently met with difficult circumstances, remember that lending to a friend or family member is about money that you can afford to lose. Ensure that your disposable income is enough for you to lend and not worry about cutting down on an impending expense. It can be the money you have kept aside to purchase something for yourself or for your home, which can be postponed by a few months, or money available for other discretionary spends. You may help friends or relatives only if you can trust them entirely.

Don’t touch your investments

A lot of times clients are convinced about lending but seek advice on how to go about it. Typically, financial planners advise them to refrain from lending if they don’t have spare cash. Withdrawing from the important life goals can impact the future. You could be putting your retirement at stake or children’s future to help someone today.

If you absolutely must help and don’t have spare cash, have a threshold for lending. If you must dip into your emergency funds, it is better to withdraw from the savings parked in your bank account rather than liquidate the investments made in fixed deposits or debt funds. 

Learn to say no 

However uncomfortable it may be for you, it is essential to toughen up and say no to a loved one in certain circumstances. If you think you don’t have enough disposable income and savings or you find situation unstable, don’t lend.

Make sure you lend only for emergencies. So if someone asks for money to finance a lifestyle need such as buying a car or even clearing credit card dues, which usually mount when the individual is unable to manage his finances properly, you should not give in.

You can also avoid lending to the same person a second time. Helping someone once is fine. If he needs money again, there could be something wrong with the way he manages his finances. It’s best not to lend twice.

Don’t be shy to ask for repayment

Borrowers keep loans from family and friends down on the priority list for repayment, hoping that they would understand that it would take time to get the finances on track. It’s also not given importance as it usually comes without interest and a repayment timeline.

If you had a certain time frame in mind at the time of lending, don’t be shy to ask for repayment. That’s why it is important to talk about repayment right at the start, when you are lending. Lend only if you are comfortable with the timeline, and once the deadline is close, don’t be shy about reminding the borrower.

Never become a loan guarantor

You may choose to encourage your loved one to take a loan and become a guarantor to that yourself. While lending has its perils, becoming a guarantor can also have issues. It is advisable not to become a guarantor.

Seeing friends and family in financial trouble can be distressing. But before you help someone else, ensure your own financial health. Learn to be honest about your financial situation with your loved ones, and remember that it’s not necessary to lend just because you can. Every time you make money available on tap, you are letting someone take you for granted. If you are still willing to lend, be mentally prepared that the money may not come back to you.