Unlike bank-issued personal loans, personal loans between friends don’t usually accrue interest charges over time
That isn’t conducive to understanding financial responsibility and effective money management. Instead, it sets them up for even more potential pitfalls in the future.
When a loved one asks you for a loan to pay off a debt or make a purchase, try to determine the real issue.
For example, could mapping out a monthly budget enable them to pay their own bills? If so, instead of handing over cash, help them plan their monthly spending and teach them how to become more financially independent.
That helps them long term as opposed to giving them money, which will likely end up as a Band-Aid solution to poor spending habits or lack of budgeting.
8. They Don’t Earn Interest
If you’d put the amount you loaned to your friend or family member in a high-yield savings account, you would have earned interest from the bank. And while the amount may have been meager, it still would have been something.
If you lend money to a loved one, include an interest rate in your agreement. It will motivate the borrower to pay and get you a small return on your loan.
9. You Might Need the Money
Without a repayment plan or due date for the loan to be paid in full, it’s hard to say if or when you’ll get it back. But what if you need to choose between making a http://paydayloansohio.net/cities/miamisburg mortgage payment or buying groceries?
If you’ve loaned your entire emergency fund to someone else, you won’t have money to fall back on when times get tough in your own household.
It’s imperative you consider your own financial situation if you have a tight budget or limited savings since that could leave you in an even more vulnerable position if unforeseen circumstances arise.
10. It’s High-Risk
If a bank refused your loved one a loan, it means the financial institution they approached deemed them too high-risk to lend money to.
That could be because they have a high debt-to-income ratio, a poor credit score, no collateral, or limited assets. And if the borrower is unlikely to pay back a loan from a bank, what makes you think they can repay you?
When lending money to a family member or friend, it’s vital you understand you may never get it back. With little to no accountability in the form of late fees or the threat of a lower credit score, motivation to repay the debt is often low.
You don’t have the same resources or collection tactics a bank does. There are ways to get repaid when a loved one owes you money, but some of them are likely to end the friendship.
If you’ve loaned money to a loved one and there’s no longer any hope for repayment, you need to decide how to move forward. If you choose not to pursue it, do your best to move on and repair any relationship damage.
If you want or need your money back, you can attempt to collect on the debt in small-claims court if it qualifies, but there’s no guarantee a judge will side with you, especially if you don’t have a written agreement or evidence of collection attempts.
11. It Could Damage Your Credit
If you’re unable to provide a loved one with a loan, they may ask you to be a co-signer on a bank loan. At first, it can seem like a win-win. You don’t have to part with your money, and your friend or family member gets the cash they need.