Should You Give a Family Member a Personal Loan?
Lending and borrowing money from a bank are governed by a set of procedures that have evolved through time. Personal lending, or lending or Borrow money from private individuals, has also been around for a long time, but no hard norms have emerged because each scenario is different. There is, however, a way to make all people involved in family loans feel safer and more secure.
There are several compelling reasons to refrain from taking out a personal loan from relatives or friends. The most important is your own personal finances. Most people aren’t liquid enough to risk losing that much money, thus assuming that the entire loan will be lost will rapidly reveal how big of a loan you can make. It’s not a loan you should take out if you must delve into your retirement account, emergency fund, or other critical fund to make it. Other things to be concerned about are family strife, tax issues, and complacency (particularly complacency). If your family or friends come to you for loans because you lend at a low (or no) interest rate, you are putting your own money at risk to help them.
A bank loan will assist them in establishing a solid credit score as well as financial responsibility. When rates of interest begin to eat at at a borrower’s income, on the other hand, the unhealthy habit of living beyond one’s means may be broken.
Before Accepting the Loan
However, you have the right to ask some questions before handing over the keys to the safe deposit box
What Is the Purpose of the Money?
You have a right to know how the loan will be used, no matter how big or small it is. If the reason doesn’t make sense to you (a vacation rather than a mortgage payment), please direct your potential debtor to the nearest bank.
How Much Time Will It Take to Repay?
If the loan is only for a few days until your next payday, you might be able to get away with a no-interest, no-terms handshake. Get it in writing if the loan is considerable in size or will take more than a month to repay. You’ll need documentation because memories of the initial agreement tend to fade over time.
What is the current financial situation of the borrower?
Although it is frequently forgotten, you have a responsibility to both yourself and the other party to ensure that the borrower is in good financial standing before lending money. It may feel awkward at first, but keep in mind that the borrower came to you for money, not the other way around.
Consider yourself a banker, and if their position is too terrible, decline.
This isn’t to say you shouldn’t pitch in. Instead of giving a loan, you may offer to assist pay for a financial advisor. Personal loan lenders frequently realise they’ve poured money into a sinking ship when it’s too late. This leads to after-the-fact intervention. Nothing can be gained except resentment because you no longer have bargaining power once the deal is completed.
Make a decision on the loan’s terms.
Verbal contracts almost never work out. Even minor, short-term loans might cause problems. For example, if the payment is two months late and you have to put all of your groceries on a credit card, you have actually lost money as a result of the loan – money you will never be able to recover — because there were no terms. Writing contracts for even the smallest loans can deter individuals from coming to you unless they have a genuine need.
Before signing, both parties should collaborate on the terms. A personal loan calculator can assist both parties envision the parameters of the loan and settle on monthly payments, a term length, and an interest rate that everyone is happy with during talks.