Asking to borrow money from a family member or friend can be a difficult and awkward conversation. The reality is nobody likes being asked to part with their money. And when you make an arrangement to borrow cash from a friend or family member, you put yourself at risk of creating a strain in your relationship if expectations aren’t met, your repayment plan is vague or you fail to make a payment on time.
But as challenging as it can be to ask someone like a parent or pal for money, it can be an even greater struggle to pay him or her back, depending on your financial situation. That’s why, if you’re going to ask for money — or you’re considering lending money — you’ll want to follow these guidelines.
[Read: 5 Cardinal Rules of Lending Money to Friends and Family.]
Do: Think about cutting yourself out as the middleman. Typically, when you borrow money from somebody, you use that cash to pay a company or an individual. Alternatively, you should consider asking the person lending you money to pay the company or individual you owe back directly, advises Julie Gurner, an executive coach and a Philadelphia-based doctor of clinical psychology.
This is a smart money move, especially if you’re planning to lend money and you’re worried that the person you’re going to provide financial assistance for won’t pay back whomever or whatever they owe on time. “Offer to make the payment directly,” Gurner suggests. “For example, if they need it for a mortgage or rent payment, you would pay that bill directly so no money goes to the relative or friend at all.”
And if you want to borrow money from a loved one or friend, suggest that the lender pay your mortgage company or utility directly. That way, you’ll eliminate a step by ensuring the person or company you owe receives a payment straight from the source.
Don’t: Assume that asking for a loan won’t impact your relationship. Elaine Rose, a public relations executive, moved from New York to Los Angeles in November 2017. She spent six weeks doing short-term rentals while looking for a place to live.
“After a large chunk of my ‘moving budget‘ went to Airbnb and Uber, I finally found the perfect spot, but was short on my first month and deposit, so I borrowed money from a friend of 10 years,” Rose says. “I’m still paying off the loan and will be done in October of this year, but I can say that although we are still friends, it did put a strain on our friendship,” she says. “Even though I’ve never missed a monthly payment, the energy between us has changed and has become more distant.”
If she could do it over again, Rose isn’t so sure she would borrow money again from friends. “It’s definitely been a life lesson,” she says.
Do: Remember to be mindful on social media platforms. “Lending money to a friend or family member can ruin a relationship, especially in the age of social media where we share everything we do online,” says Andrew Selepak, a University of Florida telecommunications professor who specializes in social media. “Knowing a friend or family member owes you money and then seeing them post pictures or videos out to dinner or on vacation when they have not given you the money back can make you angry and even bitter,” he adds.
Don’t: Borrow or lend more than you’re comfortable with. Before you ask for or offer a loan, carefully consider your financial situation. If you know you’re going to have trouble paying back your friend or family member, is borrowing from a friend or relative the best strategy? Are you really familiar with your friend or family member’s finances? Perhaps your pal or relative is barely getting by and you’re requesting that they give you money that would have been put toward a vacation or retirement savings. You’ll want to think this through, otherwise, you may trade your short-term financial pain for a long-term strain on your relationship.
And if you’re contemplating lending money to a friend or relative, “make sure it’s not more than you are willing to never see again,” Selepak says. He suggests that you think of the loan as a gift — even if it really is a loan. That way, “you will be less concerned with how they use it and when they pay you back,” Selepak says.
[See: 15 Little Things That Impact Your Finances.]
Do: Talk to an accountant if you’re lending or borrowing a lot. Things can get tricky if you start loaning or borrowing a large amount of money. For instance, if you give more than $15,000 a year to somebody, you’ll be required to fill out a gift tax return. But if you receive that same amount, you typically do not have to report the gift on your taxes, though everyone’s financial situation is different and it’s best to consult with a tax planner. Also keep in mind that if you lend somebody money, and they pay you back with interest, you will be required to report that interest.
Don’t: Co-sign for a loan. Yes, you can co-sign for a loan as a way of helping a family member or friend get access to money, but generally experts say it’s not a good idea. If your family member or friend can’t pay the loan back on time, you’ll be required to take the fault, and if you can’t pay off the loan, your credit score could plummet.
Do: Map out a repayment plan and agree on important details. Lending money does not have to be a bad experience, insists Bill McCue, the founder and executive consultant for McCuenications PR in New York City.
“I’ve loaned money to friends a few times over the years, most recently a few months ago when close friend needed some cash to buy a guitar. The key to making this a drama-free experience for parties are setting agreed-upon deadline or deadlines, [and] if the person asks to pay back in installments, to repay the loan,” McCue says.
It’s a wise idea to put your details in writing, so both parties are clear on expectations. And it can’t hurt to craft a contingency plan, in the event something goes awry. For instance, if you’re borrowing money and plan to pay the person back after you get an expected bonus, you may want to outline a payment plan in case that windfall doesn’t materialize.
If you have trouble repaying the loan, explain your situation to the person who lent you the money, McCue adds. Odds are, your friend or family member won’t be upset, but they probably will be if you disappear on them and avoid creating a concrete repayment strategy. On the flip side, if you lent somebody money and really need it back, you should mention that, too, rather than harboring resentment.
“Open and outgoing communications are key,” McCue says. In fact, if you communicate with your friend or family member about a delayed payment and end up paying them back in a reasonable amount of time, you may find that borrowing money had strengthened the relationship, rather than hurt it.
[See: 12 Ways to Be a More Mindful Spender.]
So far, that’s how it has worked out for McCue. “It’s been rewarding to help out my friends in their hour of need, and no one has ever made me regret it. I’ve received financial help from others when I’ve needed it, so it’s been great to return the favor to others.”
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A Guide to Borrowing Money From Friends and Family originally appeared on usnews.com
