Hard financial times can hit anyone and, with 58% of Americans having less than $1,000 in their emergency reserve, a person may find themselves struggling to pay their bills when such an event occurs.
Do they max out their credit cards? Beg the utility companies to pay late? Borrow money from a friend or family member?
If someone you care about comes to you for financial assistance when they’ve hit hard times, of course, you want to do everything you can to help them.
But before you start writing checks, ask yourself a few questions to help determine if its the right fit for you and your loved one.
Do you have money to lend?
When it comes to your financial ability to make the loan, ask yourself:
- Do I have enough money set aside for emergencies after making the loan?
- Am I on track with my other financial goals?
- Do I have my own debts to worry about?
- Would I still be in a healthy financial position if I never get repaid?
If you’re not able to lend the money, you can show the friend or family member that you empathize with their situation and perhaps suggest alternatives that may work instead.
Will THis Negatively impact your relationship?
Your relationship with this person is probably important to you and you’ll need to carefully consider how lending them money will affect that.
How would you deal with them spending money on other stuff — like a vacation — before paying you back in full? What if they miss payments or never pay you back? Would you be able to retain the relationship?
If lending money is going to impact the relationship negatively, then you may want to consider helping them in other ways.
Why do they need the money?
Perhaps this person is truly in a unique situation and a small loan is just what they need to get back on their feet.
On the other hand, if this person needs help on a regular basis, a cash infusion addresses the symptom rather than the underlying issue. It could be careless spending or another issue that needs to be fixed, not enabled.
Instead of offering money, offer to help them fix the problem. For example, you could help them set up a budget or offer to pay for a class like Dave Ramsey’s Financial Peace University.
lending smart
If you decide you are comfortable loaning your friend or family member money, make sure you have a conversation up front about the terms of the loan. Talk with them about how the repayment will work and make sure it works for both parties.
Once the details have been discussed, create a written loan agreement to detail the amount of the loan and how much interest will be charged and paid (annually, quarterly, monthly). Include how and when the loan will be repaid. Set expectations and steps for how late payments are handled, and any fees for late-payments and how those fees will be calculated and charged. Also, state what happens if the loan is not repaid.
Creating a collaborative agreement and setting clear expectations together will help foster a pleasant lending experience for both parties.