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Tata Capital > Blog > Personal Use Loan > 10 Vital Rules To Follow When Lending Money To Family And Friends

Personal Use Loan

10 Vital Rules To Follow When Lending Money To Family And Friends

10 Vital Rules To Follow When Lending Money To Family And Friends

People might be in a tight spot when their loved ones ask them to lend money. It would be extremely uncomfortable to say no to them. Many people do not opt for loans from banks or financial institutions because of the interest charges and the hassle of documentation. Instead, such people consider borrowing money from friends or family.

It is good to help family and friends when they are facing a financial crunch, but one should not go overboard with the family or friend loan. People must always consider their financial position and security before choosing to lend money to family or friends.

Here are 10 vital rules for lending money to friends and family:

1. Avoid credit transactions

One should not ever give a credit card to the person needing money or take a loan on behalf of friends or family. Chances of misuse are quite common, and in case the family member or friend doesn’t repay on time, then the additional burdens of clearing the credit card dues or the loan will fall on the person lending to the family or friend.

2. Know self-limitations

The most important mantra for lending money is one shouldn’t lend more than what they can afford. It makes no sense to give loans to family members or friends without having sufficient funds. It is pointless to disbalance one’s budget just to help others. While giving a personal loan or personal credit to family or friends, one should be mentally prepared that the amount will not be returned immediately or perhaps at all. Anything above the budget limit will just end up ruining relations and causing financial distress to the lender. However, if one has surplus money they can go ahead and consider lending a helping hand.

3. Consider the impact on relationships

It would be wise to keep the relationship separate from the lending arrangement. This helps maintain the relationship without it turning sour. Be cordial and set boundaries from both ends. Also, consider if there are other ways in which the family member or friend can be helped.

4. Ask the purpose of the borrowed funds

The lender needs to know the reason and they should not be hesitant to ask this question. It may sound rude to the person borrowing money from friends or family, but it is the lender’s right to know what their money is being used for.

5. Work out a repayment plan

While giving a loan to family or friends, one needs to have the assurance of how the loan is going to be repaid. This question is very uncomfortable for the lender and many do not ask keeping the relationship in mind. Ideally, the borrower should clarify this without having to ask. However, if the borrower does not discuss this topic, it is the lender’s responsibility to ask about the repayment plan. After all, one needs to plan their budget and investments accordingly. If the lender finds out that the borrower is clueless about repayment, then it is better to chalk out a repayment plan with them that would be suitable for both parties.

6. Charge a small interest

There is no harm in asking for a lesser amount of interest than market rates. This would help the lender cover the interest income they could have earned if they had invested the money somewhere instead of lending it. Additionally, this will ensure timely repayment from the borrower’s end.

7. Sign a contract

For thorough assurance, a lender can sign a deal with the borrower before lending money to family members or friends. If there are no trust issues, then both parties wouldn’t mind signing it. It may avoid a rift in the future since everything is on paper and legally enforceable. By doing this, the lender will have peace of mind and the borrower will also feel motivated to repay on time.

8. Get approval from other family members

Before getting involved in a family member or a friend loan, the lender should take the opinion of other immediate family members. They have every right to know about it, especially if they are financially dependent on that money. After receiving a green signal from others in the family, one should go ahead and give loans to family members or friends.

9. Respect the borrower

There may be some genuine reason for the friend or family to ask for help. The lender should be mindful to not mistreat them or try to control them. It must have been difficult for them to ask for help. Remember with financial difficulty comes emotional stress. There is absolutely no reason to demean the person asking for financial help. The lender should not expect any favours from the borrower and be mindful of never using the loan as a weapon against them.

10. Be prepared for the worst

When one lends hard-earned money, they should be mentally prepared that repayment may not happen on time or at all in certain cases. Instead of being shocked and lashing out at the family member or friend because of this, the lender should be prepared for things that may go wrong. However, the lender does have a right to ask what went wrong and figure out the best possible solution in a mature manner.

Closing thoughts

Many individuals refrain from giving loans to family members or friends because of things that could go wrong and end up coming in the way of an otherwise healthy relationship. People also think twice before borrowing money from friends or family. However, in unforeseen circumstances, individuals can follow these rules for lending money to friends or family to ensure the best interest of both the parties involved.

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