Family members and friends are often
sympathetic to our problems. When you find yourself in a tight money
situation, often it is a natural reaction for your family and
friends to offer help. Borrowing from those closest to you can often
lead to problems.
You need to ask yourself three
questions. Why? How? And what?
Ask yourself why you need the money.
You need to know how you will be able to pay it back and what you
will do to keep this from happening again.
If you draw a blank on any of these
questions, you need to realize that borrowing money can lead to
resentment and the destruction of relationships. There are ways that
you can minimize a potential bad situation.
Ask yourself what will happen if you
don't pay the money back. Though someone might seem like it isn't a
big deal to lend you money, it really is. Money has so many strings
that it isn't funny. Many people have emotional issues when it comes
to money, and others just can't afford to pay it back. These people
shouldn't be lent to.
This sounds so simple, but so many
people overlook it. PUT EVERYTHING IN WRITING! It doesn't matter if
it is on the back of an envelope, write all the terms down. For
example, all you have to put is that Joe is borrowing x-amount of
money on this date. He will pay back y-amount every two weeks until
the balance is paid off. The loan must be repaid by this date. Then
both people sign it. It's called a promissory note and it protects
Make sure that you include several
things. You want to have the names of the lender and the borrower,
the date of the loan and the amount. The repayment terms include the
date by which the loan must be repaid, the interest rate (not always
necessary), the amount to be paid in how many payments and when the
payments are to be made.
You aren't trying to create a legally
binding document. You are simply making the arrangement formal. This
can make each party more comfortable with what is agreed upon. And
there will be no assumption that the money is a gift. Each party has
proof of what has been discussed.
You won't have to worry about taxes
if the loan is for less than $10,000. If the loan is more than that,
make sure that you understand the tax responsibilities. Forgiven
loans are often considered as taxable income.
If you are borrowing a large amount
of money, treat the lender like the bank and offer collateral. You
may even need to pay a fair interest rate. For example, if you know
that your parents withdrew the money from savings, then you know
that they are losing interest on it for the duration of the loan. It
is only fair to make that amount up to them.
Make sure that everything is
documented throughout the life of the loan. Keep the loan agreement
and proof of repayment. If you pay with cash, make sure you get
receipts. Just watch two episodes of a small claims court on TV and
you will see the importance of all the paperwork.
Many historic figures have pointed
out that you should never do business with friends and family. You
must recognize that you could lose a relationship over money. It
happens all the time. Be honest and upfront about everything
associated with the borrowed money. And remember, that payment is
just as important as keeping the friendship.