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BASL Registration Number: 1951 | Non-Individual RIA. Regn No. INA000017620 | Validity Perpetual

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Important things to consider while lending money to Relatives & Friends:

Updated: Mar 19

Friends and loved ones are our true treasures, with whom we have a sense of belonging, who value us for what we are. But even with our near and dear ones, there could be moments of awkwardness, especially when it comes to money. It usually is a sticky situation when friends/relatives ask for money. It could be even someone in your business community. You might hesitate to offer financial help to a dear one fearing relations could get sour in the future. At the same time, you are emotionally drawn to help a friend/relative who is in a dark place money wise. Here are a few things you should consider before making the decision to lend:

Have the courage to refuse

Some people take half-hearted decisions when it comes to helping others just because they do not have the courage to refuse. This builds up resentment because they did not want to genuinely help but thought they had to. If you are one of them, then you need to learn to say ‘NO’, especially in money matters. It may sound unpleasant to say ‘NO’ to a loved one in financial need but that doesn’t make you selfish. On the contrary, it would save the potential bitterness springing up in the precious relationship in the future.

Better still, keep a policy in life to keep relations and money separate.

“Friendship and money is like oil and water” Mario Puzo

That way, you are rock-solid on the decision instead of dilly-dally and it becomes easier to say ‘NO’. There are many polite ways to say no like for eg.

  1. I am sorry but I am not in a position to lend.

  2. I am not comfortable loaning money.

  3. It is not feasible right now.

Do not go into the details of your finances. Keep it short and brief. In fact, you can help your friend brainstorm other sources of funding. If he is a good person, he will understand your situation and appreciate the offer of helping in other ways.

Lend for the right reasons

First be sure in your mind whether you want to lend or not. Your lending decision should not depend upon any emotions like guilt or pity. In fact, your lending decision should practically depend upon the borrower’s personal situation and character. If you know the person is irresponsibly spendthrift and has a history of asking money from closed ones, then you may not want to encourage such a habit. If the borrower is in dire need of money for a serious medical emergency in family, then you might consider helping him out. Another reason could be asking money for starting a business. If you find the person is sincere hardworking and has the potential, you may want to consider giving him an opportunity. So, lend for the right reasons.

Take your family into confidence

Financially helping a friend/relative may not go down well with your immediate family members including your spouse, parents, etc. Such money issues can become the bone of contention between you and your family members. If something goes wrong in the future, they will only have you to blame further stressing your personal relations. They may have their own specific reasons against lending. Hence, ensure that you seek their opinion, take them into confidence and have a mutual stand on it.

Lend money you can afford to lose

If you wish to help with money, you first need to understand that if your friends/relatives are approaching you rather than a bank/another lender, is because they expect some lenient conditions from you. You could be at the losing end of such a deal if they fail to repay. So, do not lend 100 per cent of the amount if it is a mammoth figure. Lend only which is within your means to lose. Decide the amount you can part with, after taking into consideration your personal short-term goals, budget, debt management schedule, etc.

Know the reason for loan

If you consider to help, then ask for specifics about borrowing. Knowing the purpose of borrowing will enable you to make the decision whether to lend or not in the first place. You may also be able to gauge how transparent and forthright the borrower is in sharing his financial problem with you.

Mention payback

The payback is the moot issue when lending to dear ones and you may hesitate to bring it up. If you do not mention it, the borrower may take it for granted that you do not expect the money back and are helping out of charity. If you do not want to sound rude and be direct, you can tactfully slide this into the conversation stating you would require money in the short/medium term for some goal. This would give the borrower a subtle hint that you are expecting the payback.

Put it in writing

It is a possibility that the borrower may have causally mentioned about payback but do not have the intentions to repay you the loan ever. Further, as time flies and memories fade, there could be difference of opinion on the conditions, if any, set at the time of loaning the money. So, it is better to put it up in writing to cause any friction in the future. The borrower will also take the payback thing seriously. It does not have to be a legal document. A small hand-written note including the date, loan amount given, signature of the 2 parties and of witness, period of payback, (scheduled, if any), interest chargeable (totally at your discretion) can be sufficient.

To conclude, things usually can get complicated and awkward while lending money to friends/relatives. Hope the above tips would help you in tackling such situation in the future.

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