Is lending friends or family money ever a good idea?

Loaning money to people you know can be difficult, here are some tips on how to do it (and if you should!)

Loaning a friend $20 when they’re a few days away from pay-day is generally not a big deal, but what if a friend asks to borrow a substantial amount of money? Or how about if you’re a parent and you have to lend a child money that you can’t afford to give up for good?

TODAY looked at the smart ways to lend to friends and loved ones, and below are some tips and tricks if you want to avoid strife when dealing with money and personal relationships.

1. Parents loaning to kids

Whatever your age, you’re no doubt familiar with the concept of ‘borrowing’ money from your parents without ever actually repaying it. However, as a parent, you may want to find ways to ensure that any significant sums provided to a child are returned. Here are some tips:

  • Make it clear that the money is a loan and not a gift.
  • Take a look at advice from Moneysmart.gov.au on what to do if family ask you to loan them money. As well as tips on how to talk to loved ones about money, there is also useful information on budgeting and financial hardship support offered by the government.
  • If you agree to loan your children money — consider setting up a formal repayment plan through a platform such as Credi. It’s a web-based app that allows you to create formal loan arrangements. It allows users to vary terms such as loan amount, term, interest rate, repayments before signing an e-loan agreement. The app doesn’t loan money, it acts as a platform to formalise loan arrangements.

2. Friends loaning to friends

While the love between parents and offspring is generally unconditional, there’s nothing that can tear apart a friendship quicker than a dispute over money. If a loan is agreed between friends, then using an app such as Credi (mentioned above) can help formalise the agreement and ensure that both parties are happy with the repayment plan.

Moneysmart.gov.au also has plenty of tips on what to do if you have been asked by a friend to act as a guarantor on a loan, or to co-sign for a loan. As well as tips on what to evaluate about the request, there is also guidance on questions you should ask yourself before agreeing, and how to seek out legal advice before you make the decision to act as guarantor.

3. Lending small amounts, or paying for bills

If you’re tired of picking up the bill for dinner and not seeing any money back, or taking care of household bills and waiting weeks to get your flatmates to pay their share – try an app like Splitwise.

Splitwise organises expenses that you share with other people in one place that you can access on iPhone, Android or your computer, so you can easily see who owes each other what. It calculates the balances between you and the people you are sharing bills with so you can easily determine what your debts are to each other, without (potential) arguments.

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