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How to lend money to family or friends (while still talking to them)

Before giving a loan to a loved one, consider these rules to keep the relationship ... and take care of your finances.

This article was translated from our Spanish edition. Opinions expressed by Entrepreneur contributors are their own.

When a friend or family member asks you to borrow money , you should first think about why they are asking you and not someone else. It is likely that they imagine that your business generates large profits or maybe it is because you are opening a new house or a new car. What they don't see is your line of credit or how small your profit margin actually is.

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Being a consignee of a loan to a family member or friend might sound like a better idea than delivering a loan directly, however this can end even worse if something goes wrong. As a consignee you are legally bound by the debt . If the debtor does not pay it or leaves town, you will keep all the payments, with a negative mark on your record and with a friendship in pieces.

However, this hasn't stopped many entrepreneurs from learning the hard way that family, friendship, and finances shouldn't mix. I once knew a couple who borrowed $ 20,000 from a relative. The money was supposedly meant to pay off a mortgage, but instead they used it to buy iPhones and cosmetic surgery for the wife. They never repaid the loan.

Clearly, not all loans to family and friends end in disaster, but the potential problem is so serious that you should think twice before saying yes. To save yourself grief, you should consider in advance how you will handle any potential problems; In particular, ask yourself what would happen if your loan was not repaid. How would it affect your finances and your relationship?

Some people simply decide never to give personal loans. If asked why, they reply, "I'm sorry, but it is my policy to never lend money."

But if you are thinking of lending money to a friend or family member, it is important that you take these rules into account. You will appreciate it:

1. Discuss other options

Are there other ways you can help him? Money is not always the only solution.

2. Lend only the amount you can lose

You will likely never see your money again, so it is essential that you never put your financial well-being at risk.

3. Be clear about your expectations

Make a detailed payment plan with a calendar and deadlines. Discuss with the person to whom you will loan what will happen if something goes wrong or if they cannot pay in a timely manner.

4. Put it in writing

Although if it is a loan to a family member or close friend, you probably prefer not to hire a lawyer, it is important that there is some kind of legal commitment or at least guaranteed in some way.

5. Take care of problems on the spot

You may feel like you're being generous by not sending a reminder that your payment is 30 days late, but you're just looking for trouble. Let the debtor know that you monitor payments and that you are aware of commitments.

J.D. Roth

Written By

J.D. Roth is the founder and editor of the personal finance blog getrichslowly.org and the author of Your Money: The Missing Manual.