Welcome to the “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.
Today’s question is about borrowing — specifically, how to properly borrow from friends and family.
Watch the following video, and you’ll pick up some valuable info. Or, if you prefer, scroll down to read the full transcript and find out what I said.
You also can learn how to send in a question of your own below.
For more information, check out “7 Dumb Ways to Borrow Money” You can also go to the search at the top of this page, put in the word “borrow” or “loan” and find plenty of information on just about everything relating to this topic.
Don’t want to watch? Here’s what I said in the video
Hello, and welcome to your “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this answer is brought to you by Money Talks News, serving up the best in personal finance news and advice since 1991.
Today’s question comes from Heather:
“What is a good way to pay back a loan from friends or family? Obviously, they don’t charge interest, but in how much time should it be returned, and how much money should each payment be monthly?”
I’ve covered this issue in various ways before, but let’s take a run at it one more time.
Borrowing from friends and family the correct way
Borrowing from — or lending to — friends and family is one of the most effective ways to destroy relationships. Thus, it should always be kept to an absolute minimum.
Life being what it is, however, sooner or later we’re all likely to be on one side or the other of these transactions. So, how do we do it correctly?
The following advice is for those borrowing a significant amount of money, not just spotting a pal $50 until payday.
If Heather decides to borrow from friends or family, she should approach it as she would any other loan. In short, she should do it formally, which means in writing.
She can download a free promissory note form online from a variety of sources, such as Rocket Lawyer.
She could also get the loan documents notarized. This will show the lender she’s serious about repaying the debt, as well as protecting both sides if things get ugly.
She should be specific about repayment terms. “As soon as possible” is a term vague enough to be interpreted as any time from next week to never. Spell out what happens if you should die before the loan is repaid, or if you should be unable to repay it.
Speaking of terms, I smiled when I read this part of Heather’s question: “Obviously, they don’t charge interest.”
Is it obvious that friends or family members shouldn’t receive compensation for the risk they assume? While I’ll stop short of saying a family member should always charge interest, I certainly wouldn’t label no-interest loans “obvious.” Were I to borrow money from friends, family or anyone else, I’d offer to pay interest.
Finally, the last part of Heather’s question is about how soon the money should be returned and how much each payment should be.
Answer? We repay all loans the same way, which is as soon as possible. While the terms you agree to shouldn’t require you to pay more than you can comfortably afford — and thus endanger your ability to meet your obligations — the best place to be when it comes to debt is out from under it.
So, pay it back as quickly as you can. Make your lender happy they agreed to help you.
Lending to friends and family
And now, a few words about lending to friends and family.
If you’re going to lend to friends and family, rule No. 1 is this: Don’t lend money you can’t afford to lose.
Of course, it’s hard to say “no” when friends or family approach us. So, how do we go about it? By saying things other than “no,” such as:
- “I have a strict anti-lending rule: I’ve lost too many relationships this way.”
- “That’s not in my budget. Sorry.”
- “The last time I lent you money, you didn’t pay it back. I can’t do it again. Sorry.”
The most important thing you can do is to formulate a policy before you need one. Then, you won’t have to think on your feet when the situation arises. Maybe you only lend in dire emergencies, or to relatives with jobs. Or, perhaps you decide not to lend to anyone under any circumstances.
The important thing is to decide on a policy, memorize it, practice saying it and stick to it — no exceptions. Your response should be immediate and firm.
Hope that answers your question, Heather.
I’m Stacy Johnson. See you next time!
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I founded Money Talks News in 1991. I’m a CPA, and I’ve also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.
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