Lending and borrowing cash from a bank is subject to a list of rules that have developed over the years. Lending and borrowing money from individuals, on the other hand, has been there for centuries as well, but no strict norms have developed due to the uniqueness of every situation. There is nonetheless a method through which everyone involved in family loans can feel safer and more secure.
There are a few good reasons why you should avoid borrowing a personal loan from relatives or friends. The most significant is your own money. Most are not liquid enough to afford to lose that kind of money, so assuming the entire loan is lost will quickly show how large of a loan you can take.
It’s not a loan that you should take if you have to tap your retirement account, emergency fund, or other vital fund to be able to pay for it. Other things you should worry about are family conflict, tax problems, and complacency (specifically complacency).
If your relatives or acquaintances approach you for loans since you lend them at a low (or no) rate of interest, you are risking your own money to assist them. A bank loan will help them build a good credit record along with money management skills. When interest rates start nibbling at a borrower’s income, however, the bad practice of spending more than one earns can be halted. Take all the Common Financial Mistakes into consideration when lending money or borrowing money. All should verify these requirements before accepting or offering a loan.
Before Accepting Loan
However, you have the right to ask some questions before handing over the keys to the safe deposit box
What is Purpose of Money?
You are entitled to know where the loan is going, whether it is big or small. If the purpose doesn’t sit well with you (vacation instead of paying the mortgage), kindly refer your prospective debtor to the nearest bank.
How Much Time Will it Take to Repay?
If it’s for just a couple of days until payday, a no-terms, no-interest handshake might fly. Get it signed in black and white if it’s large enough or if it takes over a month to repay. You will want paperwork because people’s memories of the first deal always tend to get worse.
What is Current Financial Situation of Borrower?
Even though it is often overlooked, you owe a duty to yourself and the other person to make sure the borrower is in sound financial shape before loaning money. It might be embarrassing at first, but remember the borrower approached you for money, not vice versa. Be like a banker, and if their situation is too dire, don’t lend it.
This does not mean you should not contribute. Rather than providing a loan, you can provide help in covering the cost of a financial advisor. Personal loan lenders often find themselves having invested money in a sinking ship after it is too late. This results in after-the-fact intervention. Nothing can be achieved except resentment since you no longer have bargaining power once the transaction is done.
Make Decision on Loan’s Terms
Verbal agreements never hold. Even small, short-term loans can be problems. For instance, if you are two months late on a payment and you must charge everything you buy in groceries on a credit card, you’ve lost money because of the loan — money you will never see again — because there was no stipulation. Contracts for writing even the most minute loans can discourage people from approaching you unless they absolutely need it.
Both parties should agree on the terms before signing. A personal loan calculator can help both parties visualize the loan parameters and agree on monthly payments, a term duration, and an interest rate that both parties are comfortable with during negotiations.
