|
|
Loans between family and friends can get complicated
When
your best friend views your nest egg as a source of start-up funds for
his latest business venture, or your nephew hits you up for a car loan,
your first impulse may be to reach into your bank account to help. But
it's a fact that loans to family and friends often end up straining
both finances and relationships. As Shakespeare said, "Loan oft loses
both itself and friend." In other words, if you lend money to friends,
you often don't get paid back and the friendship itself may
disintegrate.
It's best to consider a loan to someone you love
as an "arm's length" transaction. If you're pondering such a loan, keep
the following in mind:
- You can just say "no."
It's your money, after all. Do you really want to raid an emergency
fund or dip into your child's college account to finance a friend's
business idea? Think like a bank. It's reasonable to ask tough
questions about the person's bank accounts, potential sources of
income, planned use of loan proceeds, and spending habits before
extending credit.
- Consider a gift.
If you're comfortable sharing your resources, you may want to provide a
monetary gift with no strings attached. In many cases, this is the best
solution because neither you nor your friend expect the money to be
paid back. Unlike a loan, this type of arrangement can forestall
misunderstandings and hurt feelings later on. Of course, you should not
give money if doing so would unduly strain your own finances.
- Formalize loans.
If you decide to lend more than a small amount to a friend or family
member, it's generally best to draft a written agreement. This can be
as simple as filling out a promissory note (available online or at
office supply stores). Such forms spell out the basic terms of the loan
— amount, interest rate, payback period — and provide some limited
protection should you and the borrower end up in small claims court.
Another recent innovation is the use of direct lending (also called
social lending or peer-to-peer lending) websites to facilitate loans
between family and friends. For a fee, such sites can prepare loan
documentation, send payment reminders, issue regular reports, even
facilitate electronic fund transfers.
Remember: Many personal relationships have been damaged when loans go awry. So proceed with caution.
| |
