Your friend or loved one is likely to be deep in debt and may not qualify for a conventional bank loan. However, there are peer-to-peer lending risks you need to be aware of before giving out your money to them. Give yourself time to ponder your answer when someone you love asks you to hand over your hard-earned cash. Ask what other ways they have been trying to obtain capital. It pays to inquire and clarify that you need full financial disclosure if you consider lending money.
To minimize the burden of lending to friends or relatives, consider these extra tips:
- Only Lend What You Can Afford
An old gambling game says you can never wager more than you can afford to lose. For loans to a friend or family member, the case is usually different. You need to determine if you are willing to forget the debt to save the relationship because they may not repay the money. So, if £5,000 will ruin you financially, don’t lend it.
- Deal Only with Cash
Shut down the scheme as soon as possible if a sibling asks you to open a credit card in your name for their use or asks you to co-sign for a loan. Never put yourself in a position where the actions of someone else might impact your ability in the future to borrow or obtain credit. You can monitor cash, and your credit score will not be directly affected by lending it. Just work with money or kindly refuse if a loved one asks for support.
- Get full info
Although you might be worried about hurting the feelings of a loved one, you need to know where your cash will determine if it is worthy of a loan. Without knowing what it is being spent on, a bank will never blindly hand over money, and neither should you.
Take it as a red flag if a family member becomes upset that it’s not a deal you can make. And if you are given specifics, follow up on them. For instance, if a friend asks for a few thousand dollars for a home down payment, check out the house, its cost, neighbourhood comparisons, and how a down payment would impact the mortgage. Before making your decision, examine all of these factors.
- Consider the Impact
When you lend money to a member of the family, you influence just about everyone else you’re linked to. Other members of the family may see favouritism or encouragement, so seriously think about how they would feel about going forward with the loan.
It could also be a good idea to call a family meeting to negotiate the terms freely if you’re a parent considering loaning money to a child. That way, the decision will not confuse or harm any of your other children.
- Charge interest
It could seem excessive to charge interest to a family member or friend, but it is the fairest way to safeguard yourself. Not only would the family member be motivated by a reasonable interest rate to pay you back promptly, but it will also prevent you from being paid gift taxes on the money you lend.
- Put It in Writing
While a verbal agreement is considered legally binding, it still comes down to your word against someone else’s, and without a written agreement, you could land in hot water even though you trust your loved one to abide by the guidelines you set.
It is also an excellent method for avoiding misunderstandings to provide written facts that all parties consent to by signature. A written contract is almost ironclad in court, covering you far more than a simple handshake, should legal action ever become required.
- Practice Worst-Case Scenarios
While negotiating the terms of the loan could seem uncomfortable enough, you must always consider the unforeseeable. Sit down and talk about whether your loved one makes late payments or doesn’t pay you back at all, what will happen. Be it late charges, a collection procedure, or legal proceedings, you need to talk about a course of action. This sets the tone for a business partnership because if the contract goes bad, you both know what will happen.