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When we see a family member or close friend struggling with money, it’s understandable that we want to do what we can to help them out.
However, unless you’re lucky enough for money to be a relatively limitless resource, offering a lump sum to get them back on their feet is probably off the cards, unless you can be absolutely certain that you’ll get it back.
If you’ve been asked to help someone in financial need or want to offer some temporary assistance, here are the main things to consider before doing so.
Can you afford to lose the money?
The golden rule of lending any money, to anyone, is that you should never expect it back. Of course, lots of borrowers will be true to their word and repay every pence (sometimes with interest), but, sometimes, even with the best intentions, it can be difficult to return everything.
If you’re saving up for your own purposes and would seriously miss the cash in your bank account, it’s best to pass.
Do they have other options?
Again, before parting with your money, you might want to ask your borrower how they’ve been trying to come up with the money and see if you could help in that way. Could you look over their CV and provide tips to help them get a better-paying job? What about sitting down to give them advice about budgeting and finance management?
Lots of people simply aren’t confident in their own abilities and sometimes a little personal or organisational boost can go a long way. Just try to avoid being patronising!
Will it jeopardise the relationship?
If they can’t pay you back, how will your relationship be affected? Even if you were always prepared to lose the money, will it leave a bitter aftertaste in your mouth? Will you be disappointed? It’s also not unusual for the borrowers to cut communication out of fear or embarrassment about not being able to repay – do you want to risk it?
Could you be a guarantor?
If you trust that your friend or relative will be good for the money, but don’t have the cash to give them yourself, there might be another way. Although personal loans can be expensive (particularly if they’re not secured against a car or house), a guarantor loan is one way of keeping fees and interest costs down.
These work in the same way as a typical loan – releasing a lump sum of cash that needs to be repaid (with interest) over an agreed period. The difference is, a guarantor agrees to cover any missed payments, which lowers the risk in the eyes of the lender. Take a look at this comprehensive guide to being a guarantor, if it sounds like something you would be prepared to do.
Can you help in another way?
Money difficulties are often tied up with other troubles, like food bills, transport costs, childcare or accommodation. If you can’t afford to loan someone money but have other resources they could use, try offering those instead.
Even if it’s just once or twice a week, being able to take them leftovers, pick their children up from school or carpool with them might make a world of difference. If you’ve got a spare bedroom that you could offer for a low price (or know someone else that has), even better.
What are they using it for?
In some ways, it doesn’t matter what they’re spending the money on – it’s out of your pocket and into theirs. At the same time, helping somebody to replace their boiler or keep their car on the road feels very different to finding out they’re going to use your money to go on holiday (especially if you’re trying to save money yourself).
You’re entitled to ask what it is you’re funding and, if you’re not comfortable (or if they’re cagey about it), you don’t have to make them an offer. Likewise, you could offer to buy them vouchers or make a payment in your name but on their behalf.
What if you decide to lend?
If you have the money to lend, do your best to protect your own interests. Draw up a simple contract beforehand, clearly stating how much you are lending them, what interest you’re charging, plus how much you expect to be paid back and over what period. Should plans go awry, you have legal leg to stand on this way. An interesting type of lending is peer to peer lending.
Once you’ve both signed the agreement, arrange the money to be transferred in a way that can be tracked – bank transfer, for example, rather than cash. If you’re paying off a specific loan, you could do this yourself or at least ensure you get a receipt or proof of payment.
Finally, encourage open communication while your friend or family member is paying you back, so that if they run into difficulty, you can keep track and even renegotiate the arrangement so it can get back to where it should be. If at any point you find yourself struggling to get your money back, know that there’s a legal process you can follow.
Wendy Whitehead worked as a teaching assistant at two special needs schools in London before embarking on a different career as a marketing consultant.
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