Sometimes, a family member or friend is the only available loan source. When this is true, it is important to properly structure the loan so that it closely resembles the type of loan a person would obtain from a bank or lending institution. Failing to do so can cause serious problems.
Oftentimes, when a person asks a family member or friend for a loan and the other party accepts, the terms, if laid out at all, are very casual. This is a huge mistake. If the borrower is slow paying, fails to pay at all or acknowledge the loan, the relationship may become strained and eventually ruined. A much better approach would be to make this a business transaction possible and not a personal one. We’ll discuss how to accomplish this, below.
Create a Contract: Get specific. Every element needs to be included in the contract, including the amount of money being loaned, when it needs to be paid back and in what denominations. If interest will be charged, that needs to be stated in the contract as well. Each person, after agreeing to the terms, will need to sign the contract or lending agreement. This may seem to be a bit formal and it is. It needs to be. The clearer the terms, the less room there is for confusion and conflict.
Create a Repayment Schedule: It is a good idea to agree on a repayment schedule upfront. A loan between family members or friends should never be paid back whenever the person who borrowed the money, gets around to it. It is never a good idea for a loan to be extended or accepted without a clear repayment plan. It’s perfectly fine for the repayment period to be a generous or lengthy one. There just needs to be one in place.
Take It Seriously: It is extremely important for both parties, especially the borrower to take the transaction seriously. He or she work should work as hard to pay back the loan as they would if they borrowed it from a bank or lending institution. If they commit to doing so, the likelihood of problems developing, decreases.
Sometimes the only option a person has when they are low on cash, is to borrow it from a family member or friend. If they decide to, it is very important that it is structured in a way that eliminates many of the personal aspects which are inherent in this type of loan. Though it is impossible to do so completely and the risk remains of things not working out, friends and/or family members can decrease the likelihood of the aforementioned occurring by approaching the loan in a professional and business-like manner.
Failing to be professional and business-like rather than casual about this type of loan increases the likelihood that things will break down, for instance, the borrower fails to repay the loan in a timely manner and the relationship sours. This is something that most people will want to avoid at all costs and is something that they should work hard to do.