Money is an essential part of everybody’s life, and we all may face ups and downs in our financial journey. We may be in dire need of money at some point in time. That is when the concept of loan fits in our lives. It is kind to offer loans to your friends and family when they are in need, but according to research, these family loans are most of the times left unpaid.
To avoid such situations, there are few don’ts mentioned for a lender. You can consider the following points not to lend money to your friends or family.
No pre-decided terms
In a case where lender and borrower know each other or are related in any way, the repayment terms and conditions are not decided upon clearly, and there is no interest rate on it.
Leaving the conversation and loan open-ended, the lender is not sure as to when will he be paid back and the borrower takes his/ her time and is not clear about the repayment date.
This leaves both the parties in confusion without any expectations. Lack of communication, in any relationship, leads to problems.
In this case, wherein the repayment terms are not pre-decided, the lender is worried all the time about its loan repayment and the borrower is worried about the lenders’ expectations for repayment. This caused stress in the situation, and most of the times, leads to the tension between the lender and the buyer.
Tip: If you wish to help a friend or family, always be clear about the terms and conditions pertaining to the repayment, interest rate.
There should be a set timeline as to when the loan should be paid back, and also an interest rate should be pre-decided.
Along with these factors, proper guidelines should be attached to it. Making the terms clear in advance helps in maintaining a relation healthily.
On Least priority
With the loans and conversations being open-ended, the borrower may not realize the sense of urgency and the importance of repaying the loan in time.
Following this, repaying the borrowed to loan to the lender, becomes the last property attracting high-interest fees. To get back the loan on time, the lender can use threats and penalties.
Other than this harsh step, the borrower does not have any motivation for repayment.
In almost all of the cases, the lender has the upper hand and dominates the borrower. In case of family or friends, the borrower being a family member might feel inferior to you and would not want to keep informal communication with you.
Even in case, when you as are wrong, the borrower won’t be able to oppose you (since you are the lender). This can make your family relations go for a toss and won’t last long.
You lent the money out of concern, but the borrower may return to you in need of more money. The borrower will think of you as a person with strong financials and may tell his relatives to go to you when they need money.
The borrower might put you in a state of constant lending, which is not suitable for your financial status. In case, the borrower may have bad credit loans history, but since he/ she is your family so you won’t be able to say no and ultimately have to lend money.
The biggest drawback of lending money to your loved ones is that you lend an interest-free loan. Most likely, while lending money to your friends or family, you won’t charge any interest rate and get the principal amount back.
Otherwise, if you invest your money in any other source, you can earn interest and book profits too.
Baring the exceptions when your family is in great need of money, you can think of investing your money in various investment options.
Everybody wants their family members and friends to love them, and so do you. If you wish to cordial relations between you and your family members, you can politely refuse to lend money and suggest and find more ways instead.
Lending money in the family may hamper your relations and create a forever tussle. In many cases, it would be difficult for you to refuse money depending on the relations.
In that case, you can lend money but be very clear with your conversations. Be straight and open about the terms and conditions, repayment timeline, and interest rate involved.
It is always right, to be frank, and honest to avoid any miscommunication and confusion.