A few years ago, your brother borrowed money to help pay for groceries for several months, and paid you back. But now, he finds himself short of cash again and you’re not sure whether you want to lend her more money.
Wanting to help out a friend or family member when they’re in a financial bind may seem like a no-brainer, but you need to be sure you’re also taking care of your needs as well.
For one, you want to make sure you have enough room in the budget to pay for your own expenses — and lend money. You may also need to mitigate other risks, like potential strain on your relationship.
Let’s take a closer look at these risks and if you decide to still lend the money, how to do so responsibly.
Even if you have extra money to lend to friends and family, you still want to be careful. Think about from where you’ll pull the money. Is it from sources like your emergency fund or money you’ve set aside for taxes?
Lending money that you may need yourself means a risk of putting yourself in a precarious financial position. If the borrower doesn’t pay back your loan and you were relying on it, you’ll need to figure out how you can meet your financial obligations. It could mean taking out a loan yourself (and paying interest costs) or finding other ways to make up for the shortfall.
Even if you can afford to lend money, you risk your relationship suffering if the borrower doesn’t make payments as promised — or is unable to pay the loan back at all. It could get awkward at future social gatherings or even lead to feelings of resentment.
Still, you may decide that the risks are worth it or you’re absolutely sure the borrower will pay back what’s owed. Before handing over the cash, you’ll want to set some clear rules and guidelines.
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Before lending money, be sure you check that you can afford to. Setting clear expectations about the loans is also key.
Creating a written loan agreement can help prevent any issues or miscommunication when lending money. At the very least, the agreement should outline the amount you lent and the repayment terms.
