Lending Tips

Lending to someone you know is probably something you have not done before and if it is not for the first time, its definitely a transaction you want to get right. The relationship is the centre of the transaction. To make the loan a success, financial and emotional considerations have to be balanced.

The following 10 tips are designed with the single objective, to prevent friction between the parties throughout all phases – considering a loan, setting up a loan and its management till its repaid or forgiven.

Lending Tips

Lending to someone you know is probably something you have not done before and if it is not for the first time, its definitely a transaction you want to get right. The relationship is the centre of the transaction. To make the loan a success, financial and emotional considerations have to be balanced.

The following 10 tips are designed with the single objective, to prevent friction between the parties throughout all phases – considering a loan, setting up a loan and its management till its repaid or forgiven.

Lend only what you can afford to lose

When your kids or a mate asks for a loan your natural reflex is generosity. Helping those we love is part of our DNA. However, you need to be sensible about how you respond to requests for money. We might refer to you as the Bank of Mum and Dad, but you’re not a literal bank as you have finite resources. The last thing you want to do to call in your loan early, if you get into trouble, to discover that the person to whom you’ve loaned the money can’t repay it all on the spot, or is in trouble them self. And the impact on relationships during financial hardship can be devastating. So the first rule of being on the management team of the Bank of Mum and Dad is only dip into money you can lose without it impacting on your life.

Consider the impact on your relationship

You’ve heard the old saying, “People are funny about money.” Sadly, it’s true. Even though money is a central fact of our existence, the struggle to get it and hang on to it, causes a wide array of responses, from embarrassment to boasting about it. So when you agree to loan money to one of your children or an old buddy it’s important to understand what that financial arrangement means for your relationship. If you think that somebody being in debt to you will jeopardise that bond, explore other options (see point number three). If you and the person who asked you for a loan are comfortable with the arrangement make sure the details our laid out clearly in a contract so both parties know what they are dealing with. If you do things by the book that relationship will not only survive the term of the loan but will it thrive.

See if there is another way to help

Another popular saying is, “Money is not the answer to all problems.” Of course, a healthy injection of cash can help in most situations. However, there are often creative ways to get out of a financial squeeze that don’t involve shackling yourself to a loan. For example, if your son is desperate to buy a new car to get to uni why not think about giving him your car or your partner’s and buying something new for yourself. It means that your child has a car, whose history you’re familiar with and you can reward yourself with a new vehicle. The same goes for household items such as furniture, a fridge or a washing machine. They might not get exactly what they want but it means your child is not tied to a burdensome loan and you get to enjoy the fruits of your years of hard work. So before you lend money see if there is a creative solution to their problem.

Treat it like a business transaction

The Bank of Mum and Dad is a light-hearted term covering the reality that at some point in their lives most people will approach their parents to lend them money. In other words, it’s financial relationship between two people who share a common goal. Neither side is out to exploit the other. However, the trust that characterises most relationships between parents and children or between best mates can lead to carelessness, especially when it comes to money. Repayments are skipped and in many cases the entire loan never paid back, a situation the can rear its ugly head in subsequent decades. So it’s imperative that you seal the deal with a proper contract that lays out precisely the terms of the load (a repayment schedule and an interest rate), if that is applicable. Be motivated by love and generosity, but protect your relationship with a low-cost legal arrangement.

Only say Yes if you mean Yes

Only say Yes if you mean Yes You love your kids and your friends mean the world to you. So if they ask for a loan your natural response is to show solidarity and say, “No worries.” But then you do the math and your generosity smacks up against reality. You simply cannot afford it. So if your child or a mate pops the question, take a breather and say you’ll think about it. Then talk to your partner, your bank manager or your financial advisor. So when you come back with the answer you’re speaking from a foundation of knowledge and not making it up as you go along. If the answer is no they will be more understanding. And if the answer is yes they will be reassured they’re not putting you under pressure.

Charge a fair rate of interest

Charge a fair rate of interest When a child or a friend comes to you for a loan they’re doing so because they can’t meet the conditions put on the loan by a bank or other lending service or the interest rate is too high. So it is important you do not exploit the situation and charge interest that’s above the going rate. For the sake of a small amount of money you could poison one of the key relationships in your life. You don’t want your children or a mate thinking of you in the same terms as the bank that refused to give you money. You are the senior partner in this arrangement so it is imperative you do not act with avarice. Be fair to those you loan money to and they’ll treat you with respect in return.

Document the loan and the agreed repayment schedule

You trust your son or daughter or your mate otherwise you wouldn’t have agreed to lend them money. However, it’s important to put what you’ve agreed upon — including the repayment schedule and the rate of interest (if that is involved) — into a document that all parties sign. If there are any disputes about the terms of the loan, you will have the contract that you can return to any time. By putting it in writing and keep records of payment and interest, you will remove the emotion from the arrangement and push it into the realm of business. The impetus to give a loan is personal. However, the management of the money must be free of emotion, as it would happen with a traditional bank.

Keep good records – especially of interest earned

Relationships within families and amongst friends tend to be casual. It’s why we feel so relaxed in these circles and why members feel comfortable coming to us for a loan. It’s a circle of trust. However, this relaxed attitude should not be brought to a financial relationship with family members and friends. By keeping good records it removes the possibility of disagreement and turn what should have been a positive, relationship-enhancing experience into one that can do irreparable damage. Also you will need good records for taxation purpose. Interest is income and liable to be taxed.

Stick to the agreement

Even if you have second thoughts about lending money to your child or a mate or you need some extra cash don’t be tempted to break the agreement. For the sake of an amount of money that’s not all that important to you (see point number one) you risk wrecking a relationship with your son or daughter or ruining a friendship that is an important part of your life. This is why a literal contract — a piece of paper that both parties sign — is so important. It formalises a financial arrangement and treats it with the seriousness of a contract in the world of banking and business. Think of a binding contract as further cementing a relationship with people you love and respect.

Don’t lose sight of the relationship

While lending to a son or daughter or a great mate should be anchored by a formal agreement, never forget the human side of the transaction. Your family and friends are not your customers. They are people who make your life worth living. No amount financial push and pull is worth losing a relationship over. You might be called the Bank of Mum and Dad in jest but you’re not really a bank. You’re a father or mother and a friend. That’s why they’ve come to you. So tread carefully when you’re making out a contract to formalise a loan. You don’t want to make the person you are lending money to feel like a customer or, worse, a beggar. Treat them as equals, don’t come on like a banker in a movie and bamboozle them with financial language and don’t speak in harsh or punitive tones. It’s first and foremost a contract based on love and respect. Achieve that and you’ll discover the loan is not a burden but a strengthening of bonds between parent and child, friend and friend in need.

Lend only what you can afford to lose

When your kids or a mate asks for a loan your natural reflex is generosity. Helping those we love is part of our DNA. However, you need to be sensible about how you respond to requests for money. We might refer to you as the Bank of Mum and Dad, but you’re not a literal bank as you have finite resources. The last thing you want to do to call in your loan early, if you get into trouble, to discover that the person to whom you’ve loaned the money can’t repay it all on the spot, or is in trouble them self. And the impact on relationships during financial hardship can be devastating. So the first rule of being on the management team of the Bank of Mum and Dad is only dip into money you can lose without it impacting on your life.

Consider the impact on your relationship

You’ve heard the old saying, “People are funny about money.” Sadly, it’s true. Even though money is a central fact of our existence, the struggle to get it and hang on to it, causes a wide array of responses, from embarrassment to boasting about it. So when you agree to loan money to one of your children or an old buddy it’s important to understand what that financial arrangement means for your relationship. If you think that somebody being in debt to you will jeopardise that bond, explore other options (see point number three). If you and the person who asked you for a loan are comfortable with the arrangement make sure the details our laid out clearly in a contract so both parties know what they are dealing with. If you do things by the book that relationship will not only survive the term of the loan but will it thrive.

See if there is another way to help

Another popular saying is, “Money is not the answer to all problems.” Of course, a healthy injection of cash can help in most situations. However, there are often creative ways to get out of a financial squeeze that don’t involve shackling yourself to a loan. For example, if your son is desperate to buy a new car to get to uni why not think about giving him your car or your partner’s and buying something new for yourself. It means that your child has a car, whose history you’re familiar with and you can reward yourself with a new vehicle. The same goes for household items such as furniture, a fridge or a washing machine. They might not get exactly what they want but it means your child is not tied to a burdensome loan and you get to enjoy the fruits of your years of hard work. So before you lend money see if there is a creative solution to their problem.

Treat it like a business transaction

The Bank of Mum and Dad is a light-hearted term covering the reality that at some point in their lives most people will approach their parents to lend them money. In other words, it’s financial relationship between two people who share a common goal. Neither side is out to exploit the other. However, the trust that characterises most relationships between parents and children or between best mates can lead to carelessness, especially when it comes to money. Repayments are skipped and in many cases the entire loan never paid back, a situation the can rear its ugly head in subsequent decades. So it’s imperative that you seal the deal with a proper contract that lays out precisely the terms of the load (a repayment schedule and an interest rate), if that is applicable. Be motivated by love and generosity, but protect your relationship with a low-cost legal arrangement.

Only say Yes if you mean Yes

Only say Yes if you mean Yes You love your kids and your friends mean the world to you. So if they ask for a loan your natural response is to show solidarity and say, “No worries.” But then you do the math and your generosity smacks up against reality. You simply cannot afford it. So if your child or a mate pops the question, take a breather and say you’ll think about it. Then talk to your partner, your bank manager or your financial advisor. So when you come back with the answer you’re speaking from a foundation of knowledge and not making it up as you go along. If the answer is no they will be more understanding. And if the answer is yes they will be reassured they’re not putting you under pressure.

Charge a fair rate of interest

Charge a fair rate of interest When a child or a friend comes to you for a loan they’re doing so because they can’t meet the conditions put on the loan by a bank or other lending service or the interest rate is too high. So it is important you do not exploit the situation and charge interest that’s above the going rate. For the sake of a small amount of money you could poison one of the key relationships in your life. You don’t want your children or a mate thinking of you in the same terms as the bank that refused to give you money. You are the senior partner in this arrangement so it is imperative you do not act with avarice. Be fair to those you loan money to and they’ll treat you with respect in return.

Document the loan and the agreed repayment schedule

You trust your son or daughter or your mate otherwise you wouldn’t have agreed to lend them money. However, it’s important to put what you’ve agreed upon — including the repayment schedule and the rate of interest (if that is involved) — into a document that all parties sign. If there are any disputes about the terms of the loan, you will have the contract that you can return to any time. By putting it in writing and keep records of payment and interest, you will remove the emotion from the arrangement and push it into the realm of business. The impetus to give a loan is personal. However, the management of the money must be free of emotion, as it would happen with a traditional bank.

Keep good records – especially of interest earned

Relationships within families and amongst friends tend to be casual. It’s why we feel so relaxed in these circles and why members feel comfortable coming to us for a loan. It’s a circle of trust. However, this relaxed attitude should not be brought to a financial relationship with family members and friends. By keeping good records it removes the possibility of disagreement and turn what should have been a positive, relationship-enhancing experience into one that can do irreparable damage. Also you will need good records for taxation purpose. Interest is income and liable to be taxed.

Stick to the agreement

Even if you have second thoughts about lending money to your child or a mate or you need some extra cash don’t be tempted to break the agreement. For the sake of an amount of money that’s not all that important to you (see point number one) you risk wrecking a relationship with your son or daughter or ruining a friendship that is an important part of your life. This is why a literal contract — a piece of paper that both parties sign — is so important. It formalises a financial arrangement and treats it with the seriousness of a contract in the world of banking and business. Think of a binding contract as further cementing a relationship with people you love and respect.

Don’t lose sight of the relationship

While lending to a son or daughter or a great mate should be anchored by a formal agreement, never forget the human side of the transaction. Your family and friends are not your customers. They are people who make your life worth living. No amount financial push and pull is worth losing a relationship over. You might be called the Bank of Mum and Dad in jest but you’re not really a bank. You’re a father or mother and a friend. That’s why they’ve come to you. So tread carefully when you’re making out a contract to formalise a loan. You don’t want to make the person you are lending money to feel like a customer or, worse, a beggar. Treat them as equals, don’t come on like a banker in a movie and bamboozle them with financial language and don’t speak in harsh or punitive tones. It’s first and foremost a contract based on love and respect. Achieve that and you’ll discover the loan is not a burden but a strengthening of bonds between parent and child, friend and friend in need.

WHY YOU SHOULD JOIN THE BOMAD COMMUNITY

BOMADers use their own funds to support family members, friends and local businesses

If you are one of millions of people who are lending or borrowing money to or from friends,
family or business colleagues, or if you are thinking of doing so, then BOMAD is for you.

BOMADers support each other buying cars, moving home, setting up a business or when things get tight financially with bills

Whether you already have a loan agreement in place to give you security and support you through this process, or even if you have decided that you do not want a formal agreement, BOMAD is still for you.

By joining BOMAD you:

Find out why a formal agreement is such a good idea – even between family members and the best of friends – whether you are borrowing, lending or even gifting

Receive regular insights, news and stories from the BOMAD community – people just like you

Access the worlds #1 relationship lending platform and discover a cloud based loan management platform designed specifically for use by friends and family to give peace of mind, avoid the pitfalls of informal arrangements, and manage repayments over the life of the loan

Become part of a community that is a real alternative to Banks , Credit Card Companies and SME lenders.

WHY YOU SHOULD JOIN THE BOMAD COMMUNITY

BOMADers use their own funds to support family members, friends and local businesses

If you are one of millions of people who are lending or borrowing money to or from friends,
family or business colleagues, or if you are thinking of doing so, then BOMAD is for you.

BOMADers support each other buying cars, moving home, setting up a business or when things get tight financially with bills

Whether you already have a loan agreement in place to give you security and support you through this process, or even if you have decided that you do not want a formal agreement, BOMAD is still for you.

By joining BOMAD you:

Find out why a formal agreement is such a good idea – even between family members and the best of friends – whether you are borrowing, lending or even gifting

Receive regular insights, news and stories from the BOMAD community – people just like you

Access the worlds #1 relationship lending platform and discover a cloud based loan management platform designed specifically for use by friends and family to give peace of mind, avoid the pitfalls of informal arrangements, and manage repayments over the life of the loan

Become part of a community that is a real alternative to Banks , Credit Card Companies and SME lenders.