Credit 101: Be Careful Lending Money to Family and Friends
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Your best friend faces an unexpected car repair and just needs some “floater money” until her next paycheck arrives. Your nephew is still building his credit and needs someone to co-sign his application for a new phone. Would you help either of them out?
Both are seemingly innocent requests, but they can lead to big problems down the road—in your personal relationships and your credit score. Money loans gone wrong can ruin friendships and make family holidays very awkward. Imagine having your friend excitedly show you her shiny new iPhone…when she’s months behind on paying you back for that car repair loan. Or what if you get a collection notice for the co-signed loan that you thought was being paid on time? You get the picture.
If you’re still thinking of lending money to a family member or friend, here are some guidelines to consider:
1. You can say no without creating conflict. Your best bet is to avoid lengthy explanations about why you won’t make the loan. The more you talk, the more you open yourself up to arguments and anger. Try something simple like: “It’s my policy never to loan money. Sorry.” Or “I can see you’re in a quandary. I’m happy to brainstorm options with you, but my money won’t be part of the solution.” Repeat as necessary.
2. Offer other help. If your friend/relative is open to it, help him or her consider other options. Can you help create a spending plan? Could he or she benefit from seeing a credit counselor? Can you brainstorm options for a side job so your friend/relative can earn a little extra money?
3. Get down to business. If you decide to loan the money after all, put your agreement in writing. Include how much you’re lending, whether you’ll charge interest, how payments will be handled (Monthly? In a lump sum due on a certain date?), what you’ll do about late payments, and more. You can download a promissory note for a personal loan at sites like Rocketlawyer.com or Lawdepot.com. At Bankrate.com, you can create and print a customized loan amortization table (a loan-payoff schedule).
4. Stay on top of payments. Don’t hesitate to send a reminder when a payment is late. It indicates that you’re paying attention.
5. Co-signing is risky, too. Offering to co-sign on a loan is just as perilous—if not more so—than lending money outright. If your co-signer gets behind on payments or defaults, you’re on the hook for all that has been borrowed. Your credit score could take a beating, too.
6. Consider it a gift. Loan only what you can safely afford to lose if the person doesn’t pay back the money. Be psychologically ready to let go of the money if the person flakes out. That way, if your friend/relative actually does repay the loan, you can be pleasantly surprised.
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