The expert in financial literacy and CEO of Children’s Financial Network Neale Godfrey has advice for lending money to family and friends who will not spoil life relationships. She understands that there is a lot of emotional pressure to help dear beings in a financial crisis, but a good heart can lead to stomach burns if the two parties do not understand and agree to lend conditions. This is particularly risky when there is no paperwork or legal contracts safeguarding this transfer of money.
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Only 56% of loans are fully reimbursed according to recent research, revealing poor communication between the borrower and the lender. Anyone who makes the loan has few options because there is generally no contract and forcing the problem may have repercussions for life. In fact, a 2022 report lists financial disagreement as a cause in 20% to 40% of divorce cases. Generational loans are just as dangerous if the youngest feel the right to family workers, especially if they will inherit money.
The data highlight the mines field of this family and that of friends, the same study noting that in four lenders said “a negative impact” of the transaction. In addition, more than a quarter said they had been forced to set up official reimbursement plans to finally recover their money.
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Expectations must be set early, according to Godfrey, the borrower clearly indicating that the money must be reimbursed, unless it is given as a gift or as a “gift in kind”. A gift in kind is an agreement that certain actions, such as helping family tasks, will satisfy all or part of the debt. In addition, the reimbursement conditions should be clear for both parties before Cash changes their hands, as well as a discussion of interest and payment frequency.
It warns potential lenders to avoid allowing bad financial habits. Is this the first time that the friend or family member has requested money, or is it a usual problem that reflects deeper social problems? If this is the case, this is probably the right time to sit, work together to create a real world budget for the lifestyle of the borrower, assets and financial prospects. Also make sure that money will not be used for more bad habits, such as drug use or game.
