Should I Loan Money to My Family and Friends?

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Loaning money to a family member of a really close friend can be a slippery slope. I have always made it a personal rule not to lend money because of the strain that it can place on the best of relationships, but when a loved one or close friend is in a bind, and you are in a position to help, what are you to do?

Here are four suggestions:

1. Give Tough Love

Sometimes your family or friends will take advantage of your kindness. If you have a friend or family member that you feel is taking advantage of you, there is nothing wrong with drawing a line in the sand! Sometimes people have to learn how to get themselves out of the holes that they dig and eventually fall into. Don’t be afraid to ask them why they need to borrow money. I once had a close friend ask to borrow money so that she could go on vacation. My first thought was, if you have to borrow money to go on vacation, then you should not be going on vacation! I looked at her like she had two heads. Long story short, she never asked me to borrow money again.

2. Sign a Contract

If tough love is not the route that you want to take, and the person has a legit reason for borrowing the money, then have them sign a contract. Drawing up a contract guarantees that both parties have the same information regarding the terms of the loan. In the contract, you can work out an appropriate repayment schedule, and any interest or late fees. Should you have to take your loved one or good friend to court, having, a paper trail will come in handy. Trust me, I know this from experience!

3. Give the Money as a Gift

As long as it does not put you in a financial hole, remember your financial situation always comes first,  you can always consider giving the money as a friendly gesture. Your loved one or friend will greatly appreciate it, and it will save you the unnecessary headache that goes along with hunting someone down for repayment. I know your hard earned money did not grow on a tree, but you can always look at it as giving to charity.

 4. Suggest Other Options

Figure out if there are other ways for you to help out your loved one or friend. Does this person have issues managing their money? Sometimes learning how to budget and cutting back on unnecessary spending can get a person back on track financially. I have a cousin who has a high paying job, but for some reason she was always short on cash. We sat together and tracked her spending for a month. After cutting out unnecessary trips to Starbucks, and the Banana Republic, we were able to create a budget that got her cash flow back on track.

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