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Is It Wise to Give Out Personal Loans

Aug 7, 2008
In a tough economy, family members and friends sometimes wind up lending money to those that find themselves in a bit of a pinch. Often this turns into a much sticker situation than the two parties had originally hoped it would be. Instead of just being there for someone in a crisis, this can often lead to arguments and sometimes can lead to the dissolution of the entire relationship.

It is critical when making a personal loan that you set ground rules beforehand. Decide exactly how much will be lent and when it will be paid back. Sometimes the lender is not in the easiest situation to pay back the entire amount right away due to unemployment or excess bills. A payment play with reasonable and practical payments is the best choice for both parties. Knowing that the lender is making regular payments every month often puts the lender in a calm state of mind. This also gives the lender confidence that they truly can pay back the full amount, even if they don't quite have it right on hand at this moment.

When making a personal loan, it is important to consider the exact circumstances for the loan and the person involved. Making a loan to your child may be a much different circumstance than making a loan to your sibling. Then again, making a loan to any family member or friend who has not paid you back in the past is something that needs to be thought carefully about. There is the strong chance that they simply will not pay you back.

This has nothing to do with you and a great deal more to do with the way this person handles and respects money. This lender may simply have poor money management skills or even just be a very manipulative person. It may be a wise choice to check with other family members to see if they have also lent this person money in the past before making a second loan to someone that has not paid you back before. Asking them to also pay back this second loan and the original loan is also an excellent idea, as this teaches responsibility and helps to wipe the slate clean.

Sometimes it is more important to just help our family and friends than it is to make a loan. There are times it is better to make a gift of the money than to actually make this money be a loan arrangement. Many circumstances might determine this, but especially if someone were unemployed and they had unexpected medical bills, this might be a situation you would want to just lend a helping hand. However, there is a limit to everyone's "helping hand." You cannot simply give endlessly to someone that just takes and takes and takes with no limit in sight. There needs to be some type of plan in place.

When making a loan, write everything out on paper and actually have the lender sign it and you sign it as the lender. Give them a copy and you keep a copy too. Even though this is a close relationship, this makes it more professional and will help ensure that this loan remains as it should: a loan.
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