It is a tricky situation to be in when friends or family ask to borrow money. Ideally its best not to mix finances with a personal relationship but some of us find it difficult to say no.  In such cases the smart thing to do is treat the exchange as a business transaction and avoid any bad blood.

Think it through

Start with having the right mindset when lending money. If you are genuinely not comfortable lending money to this particular friend or family then don’t or if you need that money in the coming months it might not be a good idea to loan it out. It would definitely put a negative strain on your relationship especially if you need the money and haven’t been paid back yet.

You should always be prepared for the possibility of not being paid back and make the assumption that you aren’t going to see this money again. This is because in case you don’t get paid back, the disappointment will reflect negatively on your relationship. Remember, never lend money if you aren’t willing to lose it.

If it is a far off cousin, who you don’t see often or is known to be bad with their finances, then find a way to decline their request as nicely as possible. You probably won’t see that money again and don’t support someone’s bad habits or lifestyle.

Define the terms

It’s easy to have a verbal contract when lending money in such situations but don’t make that mistake. It’s vital to define the conditions of the loan and no matter what always put it down on paper. By putting it down on paper, you treat the exchange as a contract and make the process less casual. Define the amount, the payment terms, whether it’s going to be repaid in full or in installments and the when you expect to be repaid. You can even go ahead and include the terms of what shall happen in case the amount is not repaid.

Going through this process is delicate as it may seem like you don’t trust your family or friend to pay you back. However, if they aren’t uncomfortable with the process, it’s best you rethink lending them money. After all if they are serious about paying you back, they should be on board with writing up a contract as it not only protects your interest but their interest as well.

It might be also useful to add an additional term about what would happen in case of a death. Be realistic about the process especially if it is a considerable amount. You want to make sure that in case of your death, at least your family members get the rest of the cash. Also mention what would happen if the borrower passes away, would the amount be deducted from their inheritance, would it be forgotten or would one of their relatives have to pay it back?

If it is a large amount, talk to your lawyer and take their help in drawing up the documents and getting the correct approvals.

Communicate

Since you know the person, you both need to be transparent about the transaction and be comfortable to talk about it at any stage. As a lender, make sure you make the recipient feel easy about coming to you if they can’t pay an installment. If you feel like the terms of your contract are not being met, have a casual phone conversation about it, maybe rewrite the terms of repayment. Both parties should feel like they can discuss the matter without it being awkward.

Keeping that in mind, make sure you give the recipient some space as well. Constantly bringing it up or mentioning it in front of other friends and family is not pleasant for the recipient.  And remember, just because you lent them money doesn’t mean you can tell them how to use it.

Finding an alternative

Maybe after careful consideration you have decided not to lend your money. It could be for multiple reasons, such as you don’t have enough finances to help them out or you previously had a bad experience lending money to a friend. However, if you’re feeling bad about declining your friend or family, try helping them out in another way.  If you don’t have enough finances to lend them money, maybe offer to pay a due credit card bill or sort out a small debt for them instead. Especially if it is one of the reasons they require your help in the first place.

Another way to help out is by offering to show them how to set up a budget especially if you see them regularly struggling to sort out their finances. Perhaps even share a few saving tricks or buy them a good read on better financial planning.

Ultimately, being asked for money from a friend or family is an awkward situation to be in and handling it incorrectly could mean the end of that relationship. Therefore, give it a lot of thought beforehand and make sure there is effective communication.