When a financial emergency strikes, finding a small loan to last until expected money comes can be an answer or an additional problem. But, when a friend or family member needs a loan, should you give it to them? These loans can hurt personal relationships and cost money you can’t afford to lose.
Money Management Mistakes May Cause The Need for A Loan
When a person overspends, then must borrow money to get by until payday, changes must be made. Money management is an important part of adult life. A person with a limited income and a list of fixed financial obligations such as rent or house payment, car payment, utilities, and insurance must cover those obligations before money can be spent on other things. There must be money in a budget for food and other necessities.
A percentage of each paycheck should be put in a savings account for emergencies such as car accidents, medical problems, car repairs, and other unexpected expenses.
But, a person may make mistakes. The money may run out before obligations are met and the next paycheck is due. When too much money is spent one month, the next month may be impacted. Financial obligations must still be met, and small loans might be the answer. These loans are expensive and should be used only as a last resort.
Lending Money To Friends and Family Can Be Expensive
Some people have friends or family members who will loan them small amounts of money in emergencies. If you are that person, beware of the pitfalls of small personal loans. Follow these rules:
· Set rules and put them in writing. The amount of the loan, the date lent, and the date it must be paid back should be listed. State interest rate if any and how payments are to be made.
· Keep the personal loan private.
· Only lend money you can afford to lose. It may turn out to be an unintended gift.
· Consider saying no in a kind way.
· Set realistic boundaries. Make sure the borrower knows this money must be paid back and is a one-time deal.
· Help them find a neutral source of a loan.
Following these rules can avoid bad feelings and money disputes.
Avoid Lending Money For Many Reasons
It may be the best policy of all to avoid lending money to family and friends. If you need to lend money, only lend what you can afford to lose and insist on a firm repayment schedule. When repayment is late coming, gently but firmly remind the borrower you need the money back soon. Don’t make the borrower feel subservient to you. Don’t become a repeat lender because you may be enabling friends and family instead of helping them. Lending friends and family money can be costly because you don’t get interest and you may need the money. You can also have a damaged relationship with the borrower. Try to help the person get a loan elsewhere and learn better money managing skills.
The person resorting to short-term loans should take steps to economize and avoid the need to take out additional loans of this type. The borrower should seek money management advice from professionals such as a local consumer credit counseling service. They should spend less until their paycheck covers expenses or get a second job to increase spendable income. Use small loan options wisely and deal only with reputable lenders.