Lending money to friends or family can be an act of kindness, but it’s important to set some ground rules before you do it. Here are 5 Terms and Conditions to help protect you, the person borrowing from you, and your friendship.
How much are you lending?
First, think carefully about how much you’re willing to lend. It’s wise to only lend money you can afford to lose so you can be prepared if they don’t pay you back. Not lending more than you can afford will help you avoid harming your relationship in the long run, too.
Is it a loan?
Loaning money is different from giving someone money as a gift. With a loan, there’s an expectation that you’ll be paid back some time in future (either with or without interest). However, if the money is a gift, that means you have no expectation of being paid back. Clarifying this is vital so that the other person knows if they have to pay you back or not. A loan is also different from an investment- if you’ve been asked to invest in someone’s business for example, that type of arrangement comes with a different set of rules which you can learn about here.
Will there be interest?
Interest is a percentage of the total amount you’re lending, which is payable to you periodically. If you choose to charge interest on the money you’re lending, then the percentage, type of interest and how it will be paid all need to be clearly defined and agreed to by both of you from the beginning.
What’s the due date?
Next, it’s time for you and the person you’re lending to decide on a due date by which they’ll pay you back. Once you and the borrower have decided on this date, you should make sure that it’s honoured.
If you haven’t set a due date, you might not be able to get help in court should something go wrong. For more information on the importance of setting a due date, have a look at this informal lending example.
Get it in writing
This might seem a bit strange to do with friends and family- after all, you trust each other right? Getting the terms of the loan down in writing is a good move for everyone involved. That way, they’re clear on what they’re agreeing to and you’re covered legally, should something go wrong. Lending money to friends and family is known as “informal lending”. Since you’re not a bank or financial services provider, you’ll need to create your own document. Draw up a simple contract, which you both sign and receive a copy of. The document should include the exact amount you’ll be lending, the terms of the loan as you’ve both agreed to them, a due date and any other key information. You can use this one as a guide.
It’s great to help out friends and family in an emergency, but remember that fair dealings are a key part of all good relationships. The next time you’re asked to loan some money, only go ahead after you’ve cleared up the Ts and Cs.