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What To Consider When Lending Money To Loved Ones

07/29/2014 05:23 EDT | Updated 09/28/2014 05:59 EDT
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Have you ever had one of your friends ask to borrow money from you? Most of us are willing to oblige when the amount is small -- like $10 or $20 -- but what about when the amount is more significant? You are placed in an extremely difficult spot when a friend or family member is asking for $1,000, $5,000 or more. Whatever way you slice it, that's a lot of money.

Many people are extremely torn on this issue. Some have a steadfast rule that they will never loan money to a friend or family. They've seen friendships torn apart over an unpaid debt or they've been betrayed in this situation before. They don't want to go through it again so they refuse to loan anymore.

Others are more sympathetic and want to help out their friend, sister or brother. They think, "how can I say no?" or "what if I was in their own shoes?" For them, it's nearly impossible to say no.

Regardless of what side of the fence you are on, there are some things you should think about when making your decision. Following these tips will help you make your decision when it comes to lending money to friends or family.

• Is this a loan or a gift? - The phrase, "Can I borrow some money?" means different things to different people. It's important to make sure that both the lender and the borrower are on the same page on whether it is a loan or a gift. This often comes down to the monetary amount -- most wouldn't expect repayment on a $10 "loan" to buy a movie ticket but a "loan" for a $800 television may be a different story. When discussing the situation, don't be afraid to speak clearly and specify the terms. Be delineating whether it needs to be paid back, you'll avoid a confrontation later over a misunderstanding.

• Can you afford it? - Regardless of what the money will be going towards, you need to think about your situation first. Is lending your cousin $8,500 going to put you in a precarious financial position? It's not your responsibility to sacrifice the financial well-being of your family to help someone else. If you are leaning towards lending the money, make sure you sit down and figure out how that loan will affect you and your family. You'll need to think about this from two different angles. First, can you survive without that money until it is repaid; and secondly, can you afford it if you never get reimbursed? The flip-side of this point is whether or not your cousin is going to be able to pay you back. You should factor in their financial situation as well so you have proper expectations

• Put it in writing - If you decide that you want to lend the money, make sure you write down the terms of the loan on paper. Specify the amount to be lent, the period over which it should be repaid, and any interest that you decide to charge. You don't have to feel awkward about this because this is a way for both you and your friend to feel comfortable and will help to keep everybody on track. The worst thing you can do is to lend the money and just tell your friend to pay it back when they get the money. This leads to both of you having different expectations of the loan repayment schedule and can lead to tension. So, make a contract, sign and date it, and keep a copy.

Everybody wants to help out their friends and family in times of need. But, before you do, it's important to think about it carefully.

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