Lending money to friends / family – things to consider before agreeing to lend your hard-earned cash to someone
On occasions, a friend or relative may ask if you can lend them some money. A loan between family/friends will undoubtedly be a less formal arrangement than one executed via a lending company, but it is still a good idea to consider the following:
- Only lend what you can afford – if you really can’t afford to lend R5000, then you need to explain to your friend that you can only lend them R3000, or another amount. If you can’t realistically afford to lend them anything, then you need to be straight with them about that as well. You need to stand firm, no matter how persistent the other person might be.
- Draw up a basic written agreement – inevitably a loan between friends or relatives will not involve a formal credit agreement of the same scope as one between a lending company and one of its customers. However, it is still a good idea to write down how much the loan is, and how much needs to be repaid, and when. Make sure that the document is signed by both parties. This way, the potential for any confusion over exactly what the terms of your loan arrangement are is much reduced.
- Find out what the loan is for – although the other person might want to keep this confidential, you will probably want to know what the funds will be used for – after all it’s your money they will be using. If they are borrowing from you for the ‘wrong’ reasons, such as to go on holiday, or to buy luxury goods, you may not be best pleased.
- Once you have made the loan, take a step back – although this other person is now in possession of ‘your’ money, try to resist the temptation to try to manage every aspect of their financial affairs.
You also need to consider what the consequences might be if the person fails to repay what they owe. Before entering into the loan, think about how you would react if the other person approaches you and says they are unable to make the repayments they promised. Your friendship / relationship with that person may be ruined, as every time you meet them, or even think about them, your first thought might be ‘You owe me money’. Furthermore, their failure to repay could land you in financial trouble, leading to you needing to take out some form of credit.