What to do before lending money to friends and family

When we lend money we often do it from a place of kindness in our hearts… right?

I used to believe that such kindness should also be remembered by the debtor when payments reach their due date… but, sadly, I’ve come to change my mind. This is incredibly common!

It seems to be more embarrassing to ask for the money back than to owe it.

And let's be honest, it can be tough to set boundaries with our friends and relatives: we might not feel brave enough to ask for the money back that was ours in the first place and was promised to be repaid.

The key is to avoid the drama of a friend, sister, relative or even our partner who isn't paying back.

Before lending money, take a look at this article and forget about feeling embarrassed to ask (politely) for what's yours.

About the borrower's financial situation

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Magnifying glass on wireless keyboard at office desk

It’s very important to know about the financial situation of the one asking for money.

Think of it this way: Most banks only lend money to people they know have the capability to pay back the money with interest that the financial institution is lending.

So, be smart about this.

Make sure the income of the debtor is suitable (both in amount and stability) to pay you back in the short, medium, or long run, according to what you’ve settled.

Get a signature to seal the deal

Don't take it as an exaggeration, a signature is extremely powerful and adds seriousness to any matter.

It wouldn’t hurt to bring a document to your friend or relative (the borrower) that establishes when they have to pay you, the terms, and the total amount of money.

Don’t overthink it, just be casual about it, with cash in hand and ask to sign the document, it’ll make things way easier in the future.

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friends talking

Example:

I: _   (lender)      , will receive $______ every Monday of February from: _   (borrower)      .

Set payment dates

For example: If today you lend $500 to a friend, say you expect the money to be repaid in a month’s time.

If possible, set a specific day to receive your money back.

On the other hand, if they are going to pay you in small amounts weekly, bi-weekly, or monthly, write it down in a contract, on which days you will receive defined amounts of money.

Cover your back

If the amount gets interesting, a good way to ‘cover your back’ is by taking an asset as collateral to collect in case of not getting paid.

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Person Giving Money To hand

It's not about being abusive or taking advantage of the debtor, but a way to reduce the risk of not getting paid.

Among common collaterals, you can accept: 

  • The mortgage on a house
  • The title of a car
  • Other personal assets like checking accounts or savings accounts

Now… if the amount is not really worth a fight and they don't pay you, tell them they can buy you a few beers as collateral.

In a negotiation, both parties should win.

“Before borrowing money from a friend, decide which you need most.”

Joe Moore

In case things get ugly

It's not about fighting or threatening or anything like that. It's about being well informed, in case the matter gets more serious.

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Portrait of two angry friends having a serious conversation and discussing while sitting at coffee shop

For example: Lending $500 is not the same as lending $50,000.

If the amount of money involved can give you trouble, it's important to check what legal actions could protect you in case of default.

If you lend money, don't threaten to sue your friends or your own family for non-payment, but do your own research and get informed about your options in case you don't get your money back.

Conclusions

Faithfully follow these steps to ensure everything goes well between you and your friends, family, siblings, etc.

Be clear. Learn to set boundaries. Don't be embarrassed to say what you feel.

Have good communication with the people you care about. Be a good negotiator and keep an eye on your finances.

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