It’s true that family-friend loans can provide a cheaper leg up, but they also come with some potential risks, such as damaged relationships, tax implications, and social awkwardness. So, it’s important for you to carefully weigh the pros and cons of lending personal loans.

There are a number of ways through which lenders can safeguard their financial interest. Let’s discuss them one by one in this blog post.

1. Identify the Purpose of Borrowing

First thing first, lenders should always check the purpose of borrowing before lending the money. Lend only when there is an urgent and genuine need. For instance, avoid personal lending if the borrower needs a personal loan to repay another loan. However, personal lending for short-term deficits or medical emergencies is completely OK.

2. Know if You Need an Agreement

If the purpose of borrowing is for a long term, you should always insist on a loan agreement or collateral. This applies to big amounts too. However, in the case of short-term lending, you can choose to go by verbal commitments. Also, know how you plan on getting the money back, cash or check. Make sure the contract covers everything to avoid disputes.

3. Create a Checklist

We advise putting together a clear checklist if you are planning on lending cash to a family member or friend. The borrower may have no credit history or may have damaged his/her credit so badly that they will need to seek other alternatives. Has this borrower asked you for money in the past? If so, were you paid back? Were you paid back promptly? What is the likelihood that you will be paid back this time? Be sure to clear these queries before lending.

4. Expect Slow Repayments

The nature of family-friend loans, with no professional obligations attached, comes with slow repayments. People who borrow from family and friends usually don’t consider these loans as seriously as they do from banks. Therefore, they are far more casual about repaying the money back.

5. Keep the IRS in Mind

You may decide to lend a personal loan to a family or friend, but consider the money as a gift. This would make it easier to keep your relationship intact. However, there is one crucial thing you should be aware of. When it comes to gifting, remember the rules set by the Internal Revenue Service (IRS). Currently, $17,000 is the annual tax exclusion for gifts.

The Bottom Line

When it comes to family-friend loans, there’s no guarantee that these loans won’t bring disappointment and conflict. However, that must not stop you from helping the people you love the most. If you agree to lend money to your family, it’s better to have a clear plan in place.

To manage payment records, send automatic payment reminders, and safeguard your relationship, use the Janji-Ku app.