Loans can be extremely stressful. Add in a family dynamic or even a close friendship, and money starts to become a touchy subject for everyone involved. We all have a story: you sent Betty $5,000 for home renovations expecting to get paid back in two years. However, 3 years go by, then 4 years, and then 5, and you suddenly realize your money will probably never return. After waiting all this time, you’ve lost $5,000, begun to resent your best friend, and you have ultimately realized your longtime relationship with Betty is now damaged.
Despite everyone’s tragic loan stories, lending, or even borrowing money from friends or family can be extremely rewarding. At Pigeon Loans we believe loans among loved ones can be both successful and gratifying. Over the years, the individuals in our community have created, supported, and enabled countless loans with the people they are closest to. We decided to ask ourselves one simple question, “What is the most important thing to remember when creating a stress-free loan with your friends and family?”. We dwindled down our thoughts and experiences into 4 comprehensive tips that you can benefit from when starting your next loan. So, without further ado, we present Pigeon Loans’ 4 Essential Tips to Successfully Navigating Loans with Friends & Family.
1. Start off strong by separating business from your relationship.
One of the most important things you can do when making a loan with friends or family is to keep it “strictly business”. Making it clear that your loan is separate from your relationship will accomplish two things. (1) This mindset will help protect your relationship in case your loan goes awry. (2) Treating your loan as purely a financial transaction will allow everyone to think more objectively about the loan.
Before starting your loan, we recommend you talk about the prospects of a loan with your friend or family member openly and honestly. Concrete steps need to be taken in order to foster an open conversation about your loan, so for your reading pleasure, we have outlined those steps below:
Create a space to have conversations about the loan. For example, schedule a specific time dedicated to talking about your loan. Depending on who decides to bring up the topic of a loan first, it is best to let the other party know you will take your time thinking about the details of your loan. After seriously considering your thoughts about the loan, set up another discussion with your loved one. Navigating the beginnings of your loan in this order ensures that you are not overwhelmed and that you don’t accidentally agree to something you don’t feel comfortable with.
Ask yourself and the other party of your loan what you both want out of this agreement. Some things you should consider include:
- How much money are you willing to lend? How much money are you willing to take? Consider this in the context of your finances as a whole.
- How quickly do you want your money?
- Do you want to add an interest rate to your loan? How much interest should be charged?
- What would you do if the loan could not be repaid in full?
2. Set expectations early and in writing.
After discussing your loan and answering the above questions, make a formal loan contract. Having your thoughts, discussions, questions, agreements, and contentions in writing is a great way to set the expectations of your loan from the very beginning. Not only will you have a reference point for your loan, but you will also have documentation to look back on in case there is any confusion or disagreement in the future. Upon creating a contract, both the Lender and the Borrower should spend some time looking over the document to make sure they agree with all the clauses & terms before signing. Once signed, both parties should keep a copy of the loan agreement for themselves.
Having all of your loan matters in writing also applies to any changes you want to make to an agreement. For example, if you and your loan counterpart decide that you would like to extend the timeline on the loan, you should make an amendment to your original contract and keep these two documents in the same place.
While a lot of people believe it is a good idea to have a contract, most individuals are afraid to ask for a formal agreement. In situations such as these, using a third-party platform (*hint* Pigeon Loans *hint*) to create an agreement and manage various aspects of the loan is an easy way to have a contract without having to deal with the related challenges.
3. Don’t let late payments slide.
Having some level of flexibility when dealing with financial matters with someone you trust is important. However, having too much leniency when dealing with matters such as late payments, or underpayments, can quickly turn a stress free loan into a financial nightmare.
If all parties involved in your loan decided to schedule repayments for the 1st of each month, stick to that commitment. If payments become overdue or late you should have a conversation with the other party as soon as possible to rectify this situation. Late payments can set a bad tone for future payments. One late payment may turn into two late payments, and this behavior could continue until all of a sudden payments begin arriving in erratic intervals and are no longer paid in full.
Of course, sometimes the Borrower of any given loan really does need more time to make a payment. In these scenarios, it is best to consider extending the loan timeline. Extending a loan allows the Lender to receive more interest on their Principal and it allots the Borrower more time to pay off their debt. Before signing an extension agreement, you should have a conversation about it, just as you did with the original loan agreement, to make sure everyone is on the same page.
4. Be honest with yourself and trust your instincts.
Lending money is a risk, so you should only lend money that you are comfortable losing. Borrowing money can be a burden, so you should only borrow money if you can take on new debt obligations. Being honest with yourself about what you want out of your loan can be tricky because it means weighing your needs vs your spouse’s, best friend’s, mother’s, or even child’s needs. Trust your instincts and spend some time with your thoughts to figure out what you can and can’t do, as well as what you want to do.
Most importantly, don’t forget to enjoy the loan process. You are either helping out a friend in need or expressing a new level of vulnerability within an already strong relationship. As stressful as it may be, a successful loan can be very rewarding and can provide a lot of financial relief for both parties. So if you are ever in need of a loan, follow these tips and you’ll have peace of mind.
Want to read more related content? Check out some more of our awesome educational pieces below: