Friends and family are often the first port of call for anyone looking to borrow money.
In today’s unsteady financial climate, a loan from a friend or family member is cheaper, more convenient, and often means that there are no steep interest rates applied to repayments. Research suggests that around 44% of people have borrowed money from parents, siblings, and friends within the last 5 years.
Before agreeing to lend anyone money, you should consider the following thoroughly.
Considerations
Can you afford to lend the money? If your financial circumstances were to change suddenly, are you still solvent without having the extra resources?
Consider whether a loan and any problems with a refusal or repayments would significantly damage your relationship with the borrower.
Can the borrower realistically afford to pay the money back?
Will you formalise the loan with a loan agreement and collateral?
Will interest charges be applied? It is advisable to charge at least the same interest as you would have accrued had the finances remained in your possession.
Loan Agreements
It is always advised that borrowing is accompanied by a formal loan agreement. This should outline the amount borrowed, the loan term and the rate of any interest payments.
If either party has any doubts about whether a loan agreement should be embarked upon, this means there are already complications with the proposed loan, even before any money changes hands.
It is wise to consult a legal expert such as https://www.parachutelaw.co.uk/loan-agreement who can give advice or assistance in drawing up the loan agreement.
Formalising any loan agreements between friends and family not only serves to protect your financial position but also ensures that relationships are protected, with clear obligations and expectations from both sides outlined from the start.