We’ve all experienced it – we find ourselves strapped for cash or a friend is in desperate need of money. If you find yourself as the borrower or the lender here are some do’s and don’ts.
Conflict over money is among the most common reasons why some relationships come to a bitter end. While the intention may be to assist or support a loved one in times of need, it’s crucial to recognise the potential risks and challenges that may arise from such a situation. I’ve learned how important it is to get myself into a favourable financial position to be able to support the people closest to me. On the opposite end, it’s also beneficial that I’m not a financial burden to them even if they were willing to help me.
“Prepare your finances with setting up an emergency fund or creating a sinking fund.”
Let’s look at some risks associated with borrowing or lending money to friends or family.
Strained Relationships:
One of the primary risks associated with lending or borrowing money from close ones is the strain it can put on your relationship. Financial transactions can introduce an element of tension, transforming a once amicable relationship into a potential disagreement. Misunderstandings regarding repayment terms, delays, or disagreements over the initial agreement can lead to resentment and lasting damage.
Do: treat it like you’re lending or borrowing from a loan company. It sounds strange between friends or family but the more formalised it is the better the outcome.
Don’t: assume the other person will behave the same way when it comes to money as they normally do. People change depending on circumstances.
Unclear Terms and Expectations:
In many informal transactions among friends or family, the terms of the loan or repayment are often vague or left unspoken. This lack of clarity can lead to misunderstandings, as both parties may have different expectations regarding repayment schedules, or even the urgency of the loan.
Do: write down the amount and clearly define the terms of repayment, even if you agree the money is not required to be paid back.
Don’t: expect something different without communicating it to the other person. Clarity is key in these situations.
Financial Strain on the Lender:
Lending money to a loved one can sometimes place a financial burden on the lender, especially if the borrowed amount is substantial. This strain can be compounded if the lender is relying on the repayment to meet their own financial obligations. It’s crucial for both parties to consider the impact on their financial situations before entering into such agreements.
Do: make it clear it’s not a gift its a loan and you require the money back in a reasonable time.
Don’t: lend out more than you can afford. You can not resent the borrower later on just because you didn’t check your finances before offering.
Emotional Toll on the Borrower:
On the flip side, borrowers may find themselves under emotional stress when they struggle to meet repayment deadlines or fulfil financial commitments. Feelings of guilt, shame, or anxiety can strain the borrower’s mental health and negatively impact their relationship with the lender.
Do: ensure you keep a clear line of communication with the lender especially if you don’t think you can make payment on time as planned.
Don’t: avoid phone calls or communication, most people just want the truth and they’ll be understanding. Don’t assume because the money was lent it’s not needed back as soon as agreed.
Jeopardising Trust:
Financial transactions within the family or among friends are built on trust. When money is involved, the risk of jeopardising that trust becomes significant. If a borrower fails to repay as agreed, or if a lender becomes overly persistent in seeking repayment, the trust that once underpinned the relationship can be irreparably damaged.
Do: make a judgment call on the type of relationship you have with the person. Would you let money come between you? Is it best to seek help elsewhere? Is it better not to lend this money to avoid the drama and it could not be returned?
Don’t: put pressure on the borrower if you reach an agreement stick to the terms. Don’t make promises to the lender that you’ll pay back sooner if you know you can’t afford it. You might end up in a bad financial situation again.
While the desire to help friends or family in times of financial need is admirable, it’s essential to approach such transactions with caution. Clear communication, transparency about terms, and a realistic assessment of the potential impact on the relationship is vital.
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