We’ve written about borrowing money from family or friends if you have to, but we’ve neglected to discuss the possibility that you might find yourself in a position to lend. Assuming you’ve followed Jason Hartman’s advice and diversified your investment portfolio, you may be making more money than your family or friends. Inevitably, this leads to others asking for a quick loan. It may make you uncomfortable, and if we’re being honest, you’re probably better off saying no. But if you must, follow these simple rules and ensure the best exchange you can hope for.
First, be businesslike in your dealings. That is, make this loan an official transaction. This might feel silly between family and friends, but it’s a way to keep feelings from being hurt. Ask the borrower to sign a promissory note that lays out the loan’s terms, including when payments are due and how much they should be. Even if you’re writing a start date of two years from now, this gives your loan an official feel and ensures payment. Charge interest too—the IRS requires it unless the loan is to be taxed as a gift.
Work with your borrower to establish a plan that will work for both of you. This might include an established grace period, a future start date, etc. This way, the loan is more likely to be paid back to you—usually early. Also, make a plan of action if your borrower fails to make payments. Will you charge a late fee? If you suspect that it will cause you financial difficulty, do not agree to the loan.
Think often about the ways a loan might change your relationship or alter the way you view their spending decisions. If you’ve lent money to someone and have to watch them eat out or buy expensive electronics, it is likely to impact your relationship. Be prepared and able to overlook these decisions. Also, make sure that you run all aspects of the agreed upon loan by anyone who shares your finances. Make sure (as best you can) that the borrowing party does the same.
Finally, if you’re committed to loaning money, be prepared for the possibility that your borrower will not pay you back. If they’re asking for money, they’re likely not in a place to borrow from a financial institution—decide at what point you’ll consider the loan forgiven and tell them if it gets to that point. Don’t let it ruin a relationship—or don’t agree to the loan.(http://www.flickr.com/photos/[email protected]/7658159678/)
The Young Wealth Team