When you regularly loan money to relatives, friends and others, getting paid back can be difficult.
You may forget about the $100 you loaned your friend on vacation. Or feel uncomfortable asking your sister to pay you back the $5,000 you loaned her for a car because you know she’s financially struggling.
Lending money to friends and family members can be awkward at best, and be toxic for your relationship.
Even if you have the extra cash to loan someone you love, you still deserve to be paid back without having to nag.
Not only does insisting on personal loan repayment help you maintain your finances, it can help the other party develop better financial management skills — a win-win situation.
If you’re giving serious thought to loaning a friend or family member money, create paperwork and use a loan tracker to monitor personal loan repayments.
Lending Money to Friends: What Could Possibly Go Wrong?
It’s important to consider all the drawbacks of lending a friend or family member money.
You don’t need more material for nightmares, so be mindful of the risks and rewards of personal loans.
You wouldn’t buy a car or any other big-ticket item without weighing the pros and cons, and personal loans are no different.
First and foremost, there is a possibility the person could refuse to pay you back.
Minimize the chances of this worst-case scenario — put the loan details in writing.
Here’s a sample contract you can use to write up the loan details.
It’s a huge red flag if your buddy or nephew refuses to sign a contract or insists that a verbal agreement is adequate. If this happens, don’t lend them money until you’ve got a contract to protect your interests.
Even if your friend pays you back, they might not make full payments or pay you back on the original timeline.
If you need the funds you loaned, this can be extremely frustrating. So, before you loan that cash, make sure your own emergency fund is in good shape.
Never lend more than you can afford.
Finally, as long as your pal or cousin owes you money, your relationship could suffer. You meet up for trivia night and your friend orders two drinks. You think, he’s got cash to spend at the bar, but his last payment was a week late?!
The downside of lending money is as long as you’re owed, you judge how your pal spends money.
Your relationship can become strained as a result. Discuss all the details of payments and get them in writing before making the loan. Always be professional when you discuss the loan.
If you can, remain detached from the loan when hanging out socially and try not to track your friend’s spending.
Online Payment Tracking Tools
Automating loan payments can take the burden off your relationship by making the whole situation more professional.
There are many solutions that help you track the total balance, interest earned and payments made. Easy online options include:
If you loan cash, goods and services and you want a one-stop tracker, try YouBorrowedIt.
Ping your bandmate to return that amp or reimburse you for covering the cost of the studio rental with a photo and a calendar reminder.
You may still have to follow up to get paid back, but the app will track all sorts of personal loans for you.
You front your roommate’s share of the security deposit for your new apartment and they promise to pay you back when they upgrade their barista job to a full-time gig.
Better use expense splitting app Splitwise to help you track the loan.
If you’d rather your buddy cover all utility expenses instead of pay you back, the app will keep a running tab so you know when you two are square. For small, less formal debts, Splitwise is a friendly and fair option.
If you regularly make loans, ZimpleMoney’s automated payment collection can simplify your personal lending. You can manage one loan free ($159 loan origination fee) with ZimpleMoney or up to five for $27/year ($129 origination fee per loan).
Newcomer MoneyMola lets you input your own interest rate, payment amount and frequency. Then it generates a payment schedule and simple contract for you.
The platform takes a $10 loan origination fee and 1% of all payments, a cost-effective personal loan tracker.
With the right online tracking tool, a good understanding of common pitfalls and an upfront written agreement, you can lend money to loved ones without putting yourself in a financial strain.
Your turn: Have you ever lent money to a friend or relative? How did you make sure you were paid back? Or, share personal lending horror stories if you weren’t!
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Lindsey Day is a freelance writer in the Hudson Valley. She writes about the freelance economy and gives advice for new freelancers at AskAWorkingWriter.com.