Understanding the complex dynamics that surround family, friends and money requires looking at the cold hard truth about how money affects our friends and personal relationships within our family units. In an article from The Wall Street Journal, an interviewee went on to say how he lent $20,000 (£11,727) to a nephew and only received a few payments before the nephew stopped repaying the loan all together. The loan was for a new business. In this case study, you can see that money and family becomes a complex situation where expectations are not met and then resentment can fit in. In this Peachy guide to family, friends and money, you will learn how to set expectations to ensure that your relationships can survive.
Family, Friends & Money
It’s easy to come to family members to ask for money. Family members love you, they want the best for you and they don’t want to see you struggle. Here are some of the most popular reasons as to why family members ask to borrow money from other family members:
- Want to buy a new car
- Need to pay off big debts
- Want to get on the property ladder to buy a home or a rental property
- Want to start a small business
Some of the reasons why people approach family members for loans include:
- Easier to be approved for a loan
- Avoiding interest in most cases
- Favourable terms for the loan
Family Money Rule #1 – Never lend money you can’t afford to lose
Imagine that a close family member, perhaps a sibling or a cousin, approaches you because they need to borrow £100. The family member tells you that they need that money urgently to pay one of their utility bills. You agree with the family member that s/he will repay you on a fixed date, 2 months from now. The due date of the loan comes and goes with no cash in your account.
This is where you start panicking because you need that £100 for your own life, your bills and your expenses. More weeks pass and you have been following up but they don’t have it.
This is where it is important to follow the most important rule of family and money: do not give money to family if you cannot afford to lose the money. If you can live your life as if you didn’t have the £100 in the first place, then you can afford to lend the money. This is because family borrowers use the ties of the emotional relationship to get you to wait and wait especially if they don’t pay it back.
Family Money Rule #2 – Don’t lend the money
It can be really hard to say no a family member. You care about your family and you know deep down that you want to help them. However, as the saying goes ‘charity starts at home’ and in context of your personal finances, you can’t help anyone emotionally without having your personal finances sorted out. If your family member comes to ask you for a loan, say no if you can especially if you know that you can’t lend them the money without going into financial hardship.
What should you say if you can’t lend the money? Here are some assumptions
- “I’m sorry but financially right now, I can’t give you the money”
- “I wish I could lend you it, but right now, I can’t”
It can be hard to tell a family member you love that you can’t help them but it is better to be honest.
Family Money Rule #3 – Charge interest to children with bad spending habits who want to borrow
This rule is only applicable if you have decided to lend money to a child with bad spending habits. If you are going to lend money to children in your family such as your own children, you should help them by teaching them the concept of interest. It’s true that most of us who borrow from family members do not expect to pay interest. However, interest is a reality in the real world as we know. At its core, interest is the extra amount of money you pay onto of your loan repayment that the lender has set. Interest is charged on all types of loans such as mortgages, personal loans and payday loans.
If you are lending small amounts of money to your adult children for example, you can try and charge interest in a small amount to encourage them to avoid borrowing from you. Charging interest to family members is a controversial act but it is one that can be used if you want to teach your children the importance of managing money correctly.
Isn’t this a harsh way of lending money to family?
One trick to charging small amounts of interest to a loan to child is to only use this option if s/he is someone who does not know how to manage their money well.
Family Money Rule #4 – Get it in writing
This is one of the most important money rules that you must accept if you are going to lend money to family members. You should get your family member to agree to a contract to repay it. It can be a simple written agreement between you and the person, and you can both sign the agreement. This might seem excessive especially since most loans between family members do not have interest on them anyway. Why bother signing anything? Signing a document makes the borrower understand that this is a serious loan and that it is not a gift.
It doesn’t have to be co-signed by a solicitor or a lawyer but what it needs to say is the following:
- The name of the lender
- The name of the borrower
- The address of the lender & borrower
- The amount that will be lent
- The date when the repayment is required
- Information as to whether the repayment is required in full
Make sure that the agreement is dated. Getting the loan is writing is important so in case there are any problems in the future,
Family Money Rule #5 – Ask what it is for
Family members must be able to explain to you why they need the money. Any family member who is cagey about why they need to borrow from you is probably not going to be able to pay the money back.
Honesty is always the best policy when it comes to lending money to family members. You should ask for the reason or the loan because you need to understand where the money is going. If your family member does not want to tell you what they need the loan for, then you can tell them that you cannot lend them the money. This protects you from unscrupulous uses of your money such as gambling and betting.
Family Money Rule #6 – Look at the spending personality of the borrower
We all have a personality when it comes to spending money. Some of us are savers, some of us are spenders – and some of us live beyond our means. You need to understand what type of spender your borrower is. Sometimes this means asking tough financial questions in order to figure out if you can lend cash to the person
The types of questions to know what type of spending personality they have includes:
- Does the borrower have debts?
- Is the borrower too materialistic?
- Does the borrower have a shopping problem?
- Is the borrower reliable when it comes to paying bills?
You need to know the answers to this question so you can understand what kind of spender the borrower is.
Once you have understood how to deal with family members asking for money, it’s time to step into the world of your friends.
Friends & Money
Friend Money Rule #1 – What to do if your friend requires a loan to start a business
With banks finding it tough to lend to first-time entrepreneurs, more people are asking friends to lend them some cash so that they can start a business. In this regard, you might get friends who approach you for money for their business. If you are going to lend a friend your friend the money for the business, it should be done with the following understanding:
- You should receive an equity stake in the business
- The friend should agree to return the money to you within an agreeable time frame such as 1-2 years
- Have the agreement in writing
As a general rule of thumb, most businesses fail in the first 3 years of operation. Your friend could be the next Bill Gates or s/he might experience the business failing. The future is uncertain when it comes to small business and friendships. Only lend this money if you can afford to lend it and lose it.
Friend Money Rule #2 – Don’t lend to friends who don’t pay back
Perhaps you had an experience onetime with a friend who was late to repay you. If you have fallen into this trap, you need to make sure that you don’t fuel the fire by giving these same friends more loans.
If you have a friend who keeps asking for money, direct them to get help for their money problems so that they can break the cycle of debt.
It’s hard saying no to friends but this helps to teach financial responsibility. Friends who need to borrow money until payday can always contact payday loan companies for a helping hand.
Friend Money Rule #3 – Be prepared to lose the friendship
Something weird happens when friendship and money get involved. If you lend money to a friend and they don’t pay you back, this can change the relationship forever. In many cases, the friendship changes, resentment build. In severe cases, the friendship itself can break down and end.
You have to be prepared for this whether you loan a friend £10 or £100. The friendship is at risk as well as the money. This is why it is so important to think this through carefully.
Friend Money Rule #4 – Loans don’t become a priority; understand this before you loan money
This is one of the harshest truths of personal finance when it comes to your friends. Your friend who receives the loan might not realise that you have different financial needs and might think that you can afford to wait when you can’t. This is where the danger zone for loans starts because you see your money as a priority but your friend might not. Avoid this stress by having a due date for the loan that must be adhered to.
Friend Money Rule #5 – Agree to avoid awkwardness socially
Borrowing money from friends can be awkward when it is time for all of you to hang out. Your other friends who don’t know about the loan won’t understand why you suddenly don’t want to hang out with Friend X. Friends of Friend X who know about the loan might feel awkward around you especially if they see Friend X spending money when s/he should be repaying you what is owed!
This showed also be part of your loan agreement that in social settings, conversations about money should be avoided to ensure that no awkwardness arises. Furthermore, if you go down to the pub and your friend is there ordering drinks and having a good time, if you have agreed to give the money, you cannot be annoyed when you see them spending money. In addition, if you are the borrower, make sure you talk to the lender before gatherings so that you both agree that no money talk should arise between you.
Top tips for borrowers
If you are planning to ask a family member or friend for a loan, use these top tips to make it go easier:
- Use a short term loan company instead to avoid any stress from asking a friend or family member
- Know whether you are paying interest or not
- Have the loan agreement in writing
- Pay back the loan ideally before the due date as a sign of good faith
- Contact your family member or friend if you fall into financial difficulty
- Create a practical monthly repayment plan instead of trying to pay back the sum in one attempt
- If you borrow money to start a small business, create a quarterly repayment schedule that includes dividends of your new business.
Family, Friends & Money: Epilogue
With this guide, we want to empower you to make the right decision when it comes to dealing with money with your family and friends. As a responsible payday loan lender, we know that borrowing and lending money to friends and family is fraught with tension which is why we provide our products and services.
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