Most of us have already done this thing in life and have lent money to our friends and family and have seen the results.
As per a survey done in 2019, 60% of Americans have financially helped their friends and family members with an expectation to see it again with payback but the reality we all know, like most of us they never see that money again. Instead this results in losing up the even the relationship.
As per the 2490 people that are been surveyed 25% lost their money and 6% said their credit score got damaged because of this stuff.
Lending money to Family and friends Consequences
Now based on our clients experience and interaction with us, let’s discuss the consequences of lending money to family and friends
Souring & Damaging Relationships
We value our relationships, as they are integral part of our life but lending money to our loved ones can damage and break our relationships because when a person receives money from close friends or family members, then he is less inclined towards it than the case if he had borrowed the same amount from a bank or any other private lender. Money has a tendency to complicate the relations.
Sometimes the damage is beyond repair as friendship and relationship can be destroyed when a friend borrows money from other and he fails to pay back the amount he owe.
Even in case you are not lending money, same could also affect your relationship, so proceed cautiously in either case.
Its not only relationship that get affected by lending money to you near and dear ones but its your bank account and investment goals too that can take a hit too.
Because there is a good chance you never see that money again. Even in most of the cases the friends and family members doesn’t treat it like a loan they assume it as a gift and are not bothered to pay it quickly.
Need of Money may arise
The money you have lend was part of your plans for saving or investment, you might have kept it for your emergency fund or for down payment of your house/new vehicle.
The amount you have lent might affect your long term and short term financial goals as lending money could delay or postpone your plans and you can be affected by inflation and time factor as prices are likely to increase on a later date and you ended up paying higher amount in future than you plan for in because of liquidity crunch.
Distorted Money Management
If our loved ones are presently facing difficulties in managing their finances that lending them money might not be the best thing that we are doing for them. It may help them in their short term but will create larger problem for their fund management in long period of time.
Help them by educating and talking about best ways to manage their finances and thus protecting your relationships. Sit down and discuss their finances and help them setting up a budget, you can also offer them books on money management. Although it is very tough to say no to our friends and family members but offering help in other ways can make it work for you.
Before lending we should also see the tax implication on money lended in our country. In America, as per Gift tax exemption rules for 2019 the limit is $15,000, if you lend in excess to this amount without charging the interest you might catch the IRS’s attention and it could be deemed as gift that’s applied towards your lifetime gift tax exclusion.
Still if you want to lend the money their follow these healthy lending rules
Amount of Lending
Have very low expectations when lending to anyone, so only lend the amount of money that you know you can afford to lose and will not affect your Long term financial goals.
Written and Mutually consented document
Its difficult but always healthy to have some written document for your loan duly notarized. The document must cover the amount of loan in words and figures, time of repayment and a clear statement that this is a loan and not a gift to eliminate any confusion.
Seriousness on Payment Deadlines
If you don’t take the payment deadlines seriously than your near ones will also reciprocate the same as non payment to you have no consequences. So immediately remind them as soon as they skip or fall short of the payment deadline.
In the end, just note this is your own family and friend, so make your choices based on situations and take steps cautiously and after thinking twice after all this is your hard earned money.