Advice on family loans – do’s and dont’sCreative Finance
What happens in a situation where one of your family members is seeking a loan from you?
Well as we all should know that, lending money to family and friends is not advisable, for many reasons such as unpaid loans leading to bad blood within the family and a whole lot of friction. But if you follow a few guidelines regarding family loans you may minimise misunderstandings and preserve your relationships.
Never lend more than you can afford not to get back. If your friend or mother in law needs R100 000 for a deposit on a home, point them to the bank or somebody rich; as no loan should be beyond your own means or impact negatively on your lifestyle.
Seek verification before considering the loan by verifying what sort of person your family member is that’s asking for the loan. Are they masking a gambling or drug addiction or do they already have debts trailing them or they just may not be able to manage their finances effectively.
Enable the borrower’s bad financial behaviours by lending them the money and in turn pouring your money into a hole. Even if it’s indeed a bona fide reason such as sudden hospital costs, or down payment on a car consider this, but still seek verification.
Discuss the loan with your family to ensure that it doesn’t cause friction between yourself and your spouse or take food out of your children’s mouth. You cannot pay someone else’s school fees at the expense of your own children.
Formalise it and treat the arrangement like any other business transaction, making sure the terms of the loan are clear and sign a contract if necessary, and if the borrower is not willing to sign walk away. The contract will protect you and be legally binding.