Avoiding the Pitfalls of Loans between Friends

Poor business management can ruin friendships, and the same is true about financial management in a money-lending situation.

What are the pitfalls of loans between friends and family? Most people like to keep personal and professional business separate, especially when it comes to money.

There can be situations, however, when there really is no one else to turn to. You need money for a valid and urgent reason, and your best friend offers monetary assistance. Can you afford to turn them down? What about having the shoe on the other foot? If one of your closet friends had a pressing financial need, would you step up to offer a loan?

Here are a few tips to avoid the pitfalls of mixing friendship and money as either lender or the borrower.

Exhaust All Other Options

Borrowing from friends and family should be your last option, not your first. If you can get it from someone or somewhere else, then do so.

Before you accept money from a friend (or offer money to a friend), make sure that there aren’t any other avenues you can pursue. Perhaps one bank has turned you down, but have you tried all of them? Are there other lending institutions that will work?

Have you reduced expenses as low as possible? Sit down and create a realistic monthly budget. Calculate the amount of money you have coming in, and subtract the essentials. Do without the non-essentials for the time being. You might find more money than you thought you had because you took the time to map out monthly spending.

Make it a Business Arrangement.

Many people fail to treat a loan to or from a friend or family member like a business arrangement--and that is exactly what it is. If you do not have a solid agreement in place, it is too easy to get sloppy about the situation. You need to prepare a promissory note that outlines the amount being borrowed, the time frame for repayment, and the amount of interest (if any) that will be included in the repayment. Both of you need to keep a signed copy of the note.

Be Wise in Your Spending

Most friends and family don’t mind lending money and helping out, but it can be a problem if they think that money is being misspent.

Assume that your lender friend will watch your spending more closely than usual -- it’s human nature -- and honor their concern. You might think that something you are purchasing is a “must have,” but your friend may not agree.

Pay it back!

Anytime you borrow money from anyone, your first priority is to pay it back. Make a repayment agreement that you know you can meet, and then meet it.

If it takes longer than you anticipated, then it is important to talk to your friend and explain the circumstances. Most people will understand if there are good reasons for the delay.

You’ll be able to loosen the belt on spending again once your debt is settled. And if you are the lender, be patient. If your friend is meeting the terms of the note, you have nothing to complain about.

If they slip and don’t acknowledge it, don’t let your frustration build up – make your feelings heard and let your friend know in the nicest way possible that you need your money back as soon as they can spare it.

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