5 tips when giving personal loans to family or friends

Being asked by relatives or friends to give a personal loan can put you in an awkward situation. More so since many people often take family ties or friendship for granted when money is involved.

It’s hard to decide what to do when you have such reservations. The decision is made more difficult when the amount requested is considered large by your standards.

Here are five key areas to consider before you break open your bank.

1. Will you have regrets?

Only agree to give the loan if you really want to. It’s best to turn down the loan request if:-

• You have reservations, or

• Giving out the loan is making you feel guilty (the asker is begging for help).

You will feel bitter and resentful later if you force yourself to give the loan. This can harm your relationship with the borrower.

However, do bear in mind that refusing the request does not make you a bad or selfish person although it isn’t easy turning down a family or friend in need.

When turning down the request, offer some alternative solutions. An understanding relative or friend will ultimately appreciate and thank you for the suggestions.

On the other hand, the asker may respond with unkind words. If that happens, keep your cool. You need to think twice whether it is worthwhile to continue with the relationship.

It’s better to find out someone’s true character before any money changes hands.

2. Accept the possibility of bad debts

Accept the possibility of the loan becoming a bad debt and don’t lose sleep over it.

In other words, the loan amount you give should be what you can afford to lose – it won’t cause you hardship or change your current lifestyle.

You can’t predict future events. The borrower may have gone on to get a further loan from an illegal moneylender. Illegal moneylenders may not be professional in dealing with defaulters. If that is the case, the borrower’s new priority of repayment is to the moneylenders and not to you.

Imagine the stress, tension and anger if the borrower can’t repay you when you yourself need the money most.

On hindsight, it would have been better if you had turned down the request or reduced the loan amount.

3. Fix a repayment schedule

Have a mutually agreed upon, well thought-out, and realistic repayment schedule. This should be a fixed monthly instalment and not “pay-as-and-when-convenient” arrangement.

There must be mutual agreement on the expectation and affordability of repayment. This will help prevent disputes and avoid the “I-thought-we-were-on-the-same-page” situations. It will also confirm that the money is not a gift but a loan that must be repaid.

Setting the repayment terms may seem business-like. But it will be good for both parties to avoid miscommunication. It also sets out expectations and responsibilities.

4. Get commitment in writing

The personal loan given must be in writing. This is to avoid confusion or disagreement on the terms agreed earlier. Otherwise, the conflict may strain the relationship.

A loan document (handwritten or electronic) will make sure there is a commitment from the borrower. There should not be any doubt after the execution of the loan document. Any dispute or misunderstanding can be resolved by referring to the loan document.

A simple promissory note will suffice without hiring the services of a solicitor. It should contain the following information:

• Details of the lender and borrower i.e. name, identification number, address and signatures;

• Agreement date;

• Loan amount and period, fixed repayment amount and date, interest (if any);

• Collateral (if any); and

• Witness (optional but recommended).

5. Be strict about collections

Don’t let late payments pass without sending reminders (calls/letters).

Strict compliance with the terms of the promissory note is a must. The lender must take immediate action for any non-compliance especially the payment due date.

Otherwise, the borrower will take it for granted and form a late-payment habit. Without any action from the lender, the borrower will treat the loan agreement as only a guide and not a rule.

The lender must treat this as a commercial transaction and the borrower as a client.

Send the necessary reminder letters and phone calls. If it’s not too inconvenient, pay a visit. If all else fails, the last resort is taking legal action.

This article first appeared in https://mypf.my