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Precautions To Take Before Lending Money To Friends And Family

Precautions To Take Before Lending Money To Friends And Family
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We all wish to strike it rich one day (well, at least I do!)

Now, if you’re lucky enough to run into money, you can almost guarantee that your friends and family members will try to use you as a bank in the near future.

Initially, you may feel free to lend money to them. After all, isn’t this what friends are for?

But it is wise to take some precautions before handing over money to friends or family members. Fair warning: if you fail to do so, you could very well lose both your money and your friendship in the process. Be sure to follow the tips below to protect yourself.

Be Realistic About Your Own Financial Circumstances

Before loaning money to anyone, it is absolutely essential to make sure that you can actually afford to do so. You should never lend money that you cannot afford to lose. Even if you put precautions in place to protect yourself from non-repayment, there is a possibility that you’ll never be repaid in the future. Therefore, you should always prepare for the worst situation possible. Only lend money, if you can afford to lose it without suffering dramatic repercussions.

Think About Your Friend Realistically

While you’re at it, you should also be realistic about your friend or relative. Since you’ve known this individual for a long time, there is a possibility that you’ll give them the benefit of the doubt. Do not allow your personal relationship to get into the way. Think about their credit worthiness as if you were running a bank. Has the individual in question been financially responsible in the past? Have they had trouble paying their bills on time or repaying their previous loans? Be absolutely certain that the individual can indeed repay the loan and will do so, before handing over your cash!

Getting Collateral Can Help

It is a good idea to protect yourself from non-payment. There are a number of ways you can do so. However, these can sometimes be slightly more difficult to put in place when you’re working with a close friend or relative. One way to help ensure your friend will repay the loan is by forcing them to offer up some type of collateral or security. The value of this collateral should match the sum that you intend to lend to your friend. For instance, you can take a piece of jewelry if you’re only handing over a few hundred bucks. A car might suffice for a larger quantity of money.

If the individual fails to repay their loan, the collateral becomes yours. Then, you’ll be free to sell the item to get your money back. An item that has sentimental value as well as financial value is less likely to be forfeited. You can also read about other tips for protecting your money.

Diligently Keep Records

Keeping records is a good idea and will ultimately help to protect both sides of the arrangement. Each and every time the borrower makes a payment, you should write it down in your records and provide the individual with a receipt. This will help to ensure that you will indeed get repaid in full. Plus, it will help to quickly reach a satisfactory conclusion should a dispute arise in the near future. Keep the records on hand, even after the debt has been fully repaid.

Force Yourself To Retaliate

Since you’re dealing with a friend, you will probably have a difficult time enforcing repayment if one is missed. This is one of the most difficult problems associated with lending money to people you know well. Nevertheless, you should not hesitate to take action immediately because otherwise the individual may mistakenly believe that they can push you around. For example, you might include a term in your agreement that increases the amount to be repaid by a certain percentage for each missed payment. Alternatively, you may be forced to take the individual to court in order to get the money that you are owed.

Lending money to friends can be risky. If you’re worried about ruining a friendship, it is often better to say no.