Perhaps no other topic dealing with personal loans is more hotly debated than personal loans made between friends and family members. Perhaps this is because we have all, at some point, needed to borrow money quickly but couldn’t get it through a traditional source. Or perhaps a loved one came to us in desperate need, requesting our help. Whether you have borrowed or lent, or both, this guide will help you make an effective decision in future.
Why You Shouldn’t Make Personal Loans
Some financial experts and pop psychologists maintain that you should never make a personal loan to a family member or friend. Their reasoning is simple: placing a business relationship (lending cash) between personal relationships will put a terrible strain on both parties. In fact, financial guru Dave Ramsey goes so far as to call it a “master-slave” relationship, noting that it can fundamentally rupture friendships and family ties. Ramsey, along with other financial and relationship experts, reaches the conclusion that if a loved one comes to you with a financial need, you make a gift of the money and never expect payback. This will keep both parties from becoming locked in a business liaison that could sour and ruin your close personal ties.
Why You Should Make Personal Loans
On the other hand, there may be instances when making a personal loan is the best option for you and your loved one. As financial institutions tighten their belts, traditional personal loans have become more difficult to obtain. For some people with a less than stellar credit record, obtaining a personal line of credit from a trusted friend or family member may be their only way out of a bad situation. You may desperately want to help but can only afford to make personal loans if you have the hope of getting your money back some day. In these instances, funding a personal line of credit may be the way to go.
It’s a Personal Decision
Ultimately, the choice to give personal loans is in fact, a personal one. If you can afford to give the money as a gift and can do so joyfully, with no strings attached, then by all means do so. If you want to make an official loan, be sure to place the loan terms in writing, along with specific payback terms. Have both parties sign the paperwork and give a copy to the borrower, keeping one for you. If you make the loan a formal affair, you might have a better chance of payback, and you might have legal recourse if your borrower defaults on the loan.