June 23, 2021

7 Points to Consider while Suggesting Loan to Friends and Family

By : Ellie Brown

In times of need, be it for money or emotional support, we always look up to our family first. In the case of borrowing from a family member, you can avoid the lengthy documentation process.

It is mandatory to fulfil all the documentation requirements with a lender and adhere to their terms and conditions. Every financial institution requires your documents and some tedious processes to cater to.

For many people, borrowing from a family member is a much more feasible option than borrowing from an external source such as a lender or banks or other financial institutions.

Instead of borrowing from a family member, many people plan to borrow tenant loans from their landlords and meet their funding requirements.

In the case of lending money, if you are at the giving end, you have to be careful and take care of few things.

It is better to avoid any misunderstanding or confusion at the beginning. Try not to break ties due to any confusion in the middle of the process. It may hurt your relations and finances both.

Points to Consider while Suggesting Loans to Your Near Ones

  • Do not confuse it with a gift

Sometimes, if you are lending money to a close relative or a friend, they may confuse it with a gift from your side and may not consider repaying it. They may take the whole loan process casually.

Therefore, it is essential to clear out things at the beginning. Your message should be very clear and should not stand a chance of any miscommunication.

Be clear with the repayment timeline, the interest rate and any other terms and conditions. Conclusively, ensure it is a loan ad, not a gift.

  • Other than financial ways to help your family

It is kind of your to help your family in monetary terms. But if you do not lend the money, you can think of some other ways to helps your family such as offering them employment or becoming a co-signer for their loan approval from an external source.

Becoming a co-signer may involve the risk of impacting your credit score in case the borrower fails to pay back the original amount.

If you do not want to offer money considering your future relationship with them, you can help them procure funds in any other way.

  • Be aware of the legal formalities involved

If you have decided to lend money to your family or friends, make sure you are aware of all the legalities involved in the process. Also, sound off all the legalities to the borrower as well.

To secure your transaction, the best way is to hire a legal attorney who will make you aware of all the risks involved at every step.

You also have to know the purpose of borrowing before you lend them the money. Once you have taken all the measures, you can go ahead with the lending process.

  • You can use online modes

To ensure the security of your transaction, you can choose an online medium such as online banking. This will keep a record o your transaction and leave no scope for any conflict.

If your family is insistent on getting cash, you can pay a small part in cash and the entire remaining amount through online banking.

  • The interest rate

Mostly, the amount that you lend to your family or friends is tax-free; hence, the interest rate is totally up to you to decide. It is crucial to know that it will be counted as your taxable income if you are charging interest on the loan amount.

Most people in need of money are willing to borrow from a family member or a friend to pay a lesser interest rate than the prevailing rates in the market.

Thus, if you are charging an interest rate on the amount, you can decide the tenure according to you. The tenure and interest rate must be agreeable by both parties to run the process smoothly.

  • Say no if required

If a family member or friend approaches you and does not have the required funds to lend them, do not hesitate to say no. Communicate your condition politely y to them and not be harsh in your approach.

Be clear and polite with your reasons and offer them help in finding other alternatives for their funding.  

  • Is it essential to share a contract?

If you have any hitch or doubt, you can always go for a legal contract to make things official. You can also go for a promissory note, i.e., the borrower’s promise to pay back your amount within the stipulated amount of time.

In your note, you can include any condition such as the agreed rate of interest, the payback tenure, the total amount payable. I case of an agreement, make sure to have witnesses to avoid any disagreement or conflict in the future.

Before getting into any agreement, always remember the consequences if the borrower cannot pay the loan. It can either lead to sour relationships, or you may break the ties completely.

The final thoughts

You should always be careful in lending money to your family or friends. Consider each and every point before getting into the lending process.

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