It is a known fact that taking a loan from friends and family helps you save a lot on tax, interest and compiled interest issues that come with loan repayment.
Also, it is well known that getting a loan from family and friends helps you avoid the shame of bank harassment or going to a total stranger to build a rapport over a loan. However, Creditcard.com carried a research on the effect of giving family and friends loans. The result has it that 42% of the research's respondents have lost lots of money to their relatives due to loans.
While you may want to argue that no man is an island and that family and friends are the solutions to most financial needs, we can not take away the bad side of taking loans from relatives and friends.
Having noted that, here are four solid reasons you should not lend money to family and friends.
(1). It's as good as no loan: two of the major guiding principles of a loan are the collateral and the interest. These two items come in handy as a means of recovering your money back and an added percentage of money used for business over some time respectively.
However, because the loan goes to a relative or friend, the sentiment makes it difficult to mention interest, let alone collateral. When things go south, it becomes difficult to get the money back.
(2). Loss of money: Due to lack of documentation of the loan, it is usually difficult to get loaned money back from most relatives and friends.
Also, because it wasn't officially done, taking legal action against the person becomes impossible. This most time leads to the loss of huge sums of money
(3). You may need that money: Money shouldn't be regarded as free or idle money because needs arise at most unexpected times.
Hence, when approached to loan out money to family and friends, always remember that the need for that may arise immediately after the money has left your account, and you may not have another persona to borrow from.
(4). You are usually the last option: Did you know that 90% of people who ask family and friends for a loan wouldn't do it if the terms and conditions at the banks were easy?
Also, do you know that some of them would have also tried other loan houses and they weren't qualified?
That was when the idea of coming to a friend or a brother occurred to them. Most times due to the sad or enthusiastic stories we are told by family and friends, we end up not asking the appropriate questions like:
Have you tried the bank?
How come you didn't use a loan company?
How come you didn't qualify?
However, because this stage is usually skipped, family members end up falling into the trap of giving their relative loans hoping they would pay back at an orally agreed date. This usually leads to the end of the relationship and/or loss of money.
Bottom line
Helping people with loans to attend to their problems isn't bad. It is usually advisable to document it and have a legal practitioner stamp it. However, when it comes to friends and family, most times it is preferable to not loan them but to give the amount that won't be paid back.
If you however insist on loaning family and friends, officially handle the matter and let both parties know the legal implication of every document drawn up and signed.
