Many of us believe that we should not lend money to friends and family. As advised by Shakespear through Hamlet “Neither a borrower nor a lender be”. Why so? Why shouldn’t we lend money to friends and family? This is answered in the second part of the quote “For loan oft loses both itself and friend.” meaning a loan to a friend or family member often leads to loss of both money and the relationship with the other person. And these loans could produce accidental results.

Consider most of these problems and ways to overcome those if you still want to go for lending to family and friends.

Most of us are fairly generous and go to lengths to help our friends, help with money also. Secondly, in today’s easy credit environment someone who cannot get a loan often has damaged or no credit. Both of which puts the lender’s money at great risk. and there is a fair chance that the invested money won’t return. So let’s start with why shouldn’t you lend money to relatives.

Why shouldn’t you lend money to friends and family?

Neither lending money to friends or borrowing from relatives works out well. People often end up in issues in both the situations. The main reasons because of which these are not successful are that these loans are open-ended, interest rate and loan clauses are not properly defined.  All the important details of loans are missing. Without these, the lender and borrower don’t know about the payment schedule, which reduces the chances of repayment to the lender.

There are chances that at the lender would not charge any interest because of relation with the borrower; this is a loss situation as you could have earned fair interest via banks or p2p lending. After the money is lent these loans are forgotten, they no longer remains a priority. And because of the relation, longer can’t ask for money back; not even in a case of extreme emergency. This could further make gatherings awkward.  All these put your money to risk as well as you relation.

Lending to close ones the right way!

If you have already decided on lending to your relatives or close ones, better do it in a correct way. First of all, before lending the money you should define the basic terms like interest rate, repayment dates and give them a proper timeline and schedule for repaying the loan. The schedule give them guidance to make repayments and timeline defines the time frame in which the loan should complete. You should set deadlines for the regular instalments, this helps avoid any misunderstandings. In case you have lent to a friend and need the money back, send gentle reminders and talk to the friend, he/she would understand.

Charging interest on loans to your family may seem absurd, but it is silly not to charge. You can charge cheaper rates than the market, but you should surely charge some interest. And while lending if you feel that you might need the money, you should tell this honestly. Importantly, you should discuss this beforehand that this transaction should not affect the relationship you share.

Exilend which is a loan tracker and p2p lending solution can support all this. Here you can record your loans, and it sends both parties reminders and notifications about the transactions and shows balance and tentative balances.

If you have every lent money to friends or family, please share your experience in the comments below.