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Money Management

The Tricky Practice of Loaning Money

Nothing sours relationships like an unpaid debt.

I don’t really like loaning money to people, though I think that’s because I’m a tad neurotic and always worry they’ll forget to pay me back. Of course, I wouldn’t have that fear if more than one person hadn’t borrowed money from me and then didn’t return it until I talked their ear off. But I digress; loaning money to family and friends can be a bit of a complicated matter when it’s just twenty bucks, to say nothing of a full-scale home loan or something equally large. Loaning out large sums of money to people you care about is a great way to make you stop caring about them, so before you open your checkbook, you might want to make a plan.

If someone asks you for a large loan, do not agree right away. Even if it’s your best friend or your dearest relative, a large loan is still an investment, and not everyone can carve out a massive slab of their net worth out of the goodness of their heart. Before you agree to anything, take a day to think it over, while also checking your own funds and upcoming expenses. The last thing you want is to loan out a large sum of money, only to find you can no longer afford to eat. While it may be a bit uncouth, you should ask your friend/relative what exactly this money is going toward. It is your money, after all, and so it’s up to you to decide whether this endeavor is actually important. A home, a car, medical payments, or other vital life expenses are definitely worth considering. A pool installation or a new TV is definitely not worth considering.

Once you’ve made a decision, you should get it in writing and, if possible, set up repayment dates. Unless you’re a millionaire, you’re going to need that money back at some point, or else it stops being a loan and starts being a gift. Both you and the one receiving the loan should sign an agreement and settle on a reasonable payment schedule. If you don’t need it back right away, that’s fine, give them a larger time frame, but don’t just leave the responsibility of repayment up in the air.

With any luck, your friend or relative will agree to your terms, send the money off to wherever it needs to go, and repay you in a timely manner.

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