Personal lending between friends and family can be fraught with pitfalls. Particularly for those who find it hard saying no even when loaning the money puts pressure on their own bank balance.

In an ideal world, we’d all love to help out the important people in our lives, however we can. But, in reality, it’s just not that cut and dry. So, we’ve put together five things to think through the next time you’re hit up for a loan from friends and family.

What’s your budget like? It’s easy to do a few quick sums in your head and before you know it be saying: “Sure I can loan you that.” But stop. First things first, always remember that your priorities and goals come first – and don’t be sorry about that. Take some time to really think through the consequences of not having the money in your bank account. Are there things you might like to do that you’d miss out on; what  savings interest will you forgo; how else would you use the money? If you’re happy that none of these things are more important than helping out your friend or family member, then go for it. But at least you would have considered all options, eliminating the possibility of regret a couple months down the track.

Get to the reason: what is the money for? Sometimes the best answer is no when someone close asks for money. It’s one thing if your friend or family member is in a short-term bind – unplanned car trouble; big bill month etc – but it’s another if the loan is another band aid attempt to cover up long-term mismanagement of their money. If you get the sense that the loan would be a short term fix for an on-going problem, the best thing you can do for them and for you, is to say no. It might be just the thing to help them take responsibility for their situation and start to sort it out.

What would the conditions be? We all have varying definitions of the word ‘soon’. Before making a decision on whether you’re comfortable to loan to your family member or friend, have a frank conversation about what they would commit to in terms of paying back the loan; whether they were planning on paying it back in one lump sum or regular payments over time; and what contingencies they would put in place if they were unable to meet the commitment.

If you feel happy about the conditions, treat the loan like a business deal; write up the details and sign it.  Keeping things transparent and separate from your relationship is the only way to avoid potential issues down the track. If either of you are not comfortable making it formal, then the best thing is to just say no.

What happens if you need the money back before time? Situations change and if you do agree to lend the money, you may find that you need it back earlier than expected. How would your friend or family member deal with this? Would they be able to pay in full before the agreed time? What would be the potential ramifications for your relationship?

How do you both handle conflict? We don’t go into these arrangements expecting that they’ll end in conflict, but sometimes they do. Plan for the worst and expect the best as they say. Take some time to think about your relationship and what would happen should the loan become the gremlin in the corner every time you meet up. How would you feel? How would you handle it? How do you think they would handle it? If it’s not a pretty picture then, just say no.

Taking the time to think through your needs – what you would need the agreement to look like if you were to lend – and openly discussing those needs with your family member or friend, does two really important things (1) It helps to empower you to make the right decision for yourself and (2) It helps to protect the relationship.

We all love saying yes to those we are close to, but a well thought out no today is much better for everyone than an ill-informed yes tomorrow.

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