When someone you love is in a tight spot in the finance department, lending them some money may feel like the right thing to do and it certainly can be, but things have the potential to get, well, sticky if there are any disagreements or miscommunications. But what are the dos and don’ts of lending out money? Don’t worry, we got you.
Trust Fall
If you’re lending money to someone and expect to see it again, it’s okay and encouraged to be selective about who you loan it to. Being choosey about who you loan money to will save you from any negative consequences and lots of headaches in the future. Now, if you don’t feel comfortable lending to someone, you can politely decline. Ultimately, this could be saving your relationship. Another option? If you feel comfortable enough to do so, ask for collateral equivalent to the loan amount that you can hold on to until the loan is paid off.
Clear as Crystal
Are you gifting the money or are you expecting repayment? Whatever the case may be, make sure both you and the person you’re lending the money to understand the terms in full but don’t stop there…
Take Note
It’s always a good idea to have a paper trail because miscommunication happens. For a proper paper trail, draw up a contract that you can both agree to and sign, a contract that makes it clear what your responsibilities are. The contract should also include your name and the borrower’s name, the date the loan was granted, the amount of money being lent, the minimum monthly payment, the payment due date, and the consequences of default. If you’re giving out a hefty loan, you may consider talking to an attorney to draw up the paperwork.
Cosign? No Sign.
There’s a chance that someone you know who is in financial distress may ask you to cosign a loan for them. If this happens, just say no. When you cosign a loan you’re saying that you’ll take on the responsibility of another person’s debt, and that debt could end up on your own credit profile.
Only Lend What You Can
If someone needs a BIG loan, like big enough that it will put you in a financial pickle, take the time to cook the books and see how much you can loan out comfortably, then loan that amount and not a dollar more. The goal here is to avoid needing a loan yourself!
No Guilt Zone
Don’t let your guilt guide you on this one, or any other kind of pressure while you’re at it. If you’re feeling obligated to loan someone money but it doesn’t make a lot of sense for you to do it, consider helping them in another way, like pointing them in the direction of some good resources.