8 tough questions to ask before lending money to family or friends

In tight times with high inflation and a debated recession, many households feel squeezed by rising costs and interest rates. Asking family and friends for money is the first line of defense for a lot of them.

Many of my fellow first- generation wealth builders and sandwich- generation wealth protectors face the dilemma of whether or not to lend money to family and friends.

Money pulled heartstrings and clouded their judgement as they contemplated the lending decision. They don't want to lend money because they don't want to trust someone who is in debt.

We sold our Florida home. We made a $200,000 profit. She doesn't want me to get my fair share. What am I going to do next?

Consider this before lending money

Before you lend to a family member or friend, make sure to ask yourself some questions.

• Are you willing to lose the money? Lending money to anyone is risky, particularly if it’s not a bona fide business transaction. To keep expectations of repayment flexible, you may have to consider the funds “as a gift instead of a loan,” as I explained on a recent CNBC segment.
• Are you willing to let money jeopardize your relationship with the borrower?
• What is the emotional capacity of the prospective borrower when handling business matters with family or a friend?
• Will you be able to keep your emotions in check and interact peacefully with a delinquent borrower at your next family reunion or holiday?

Shakespeare said, "Neither a borrower nor a lender be for loan oft loses both itself and friend"

My friend takes care of my child. I pay her a daily wage. Is she being taken advantage of?

Questions to ask a borrower

You should be prepared to ask questions of the prospective borrowers. Money conversations are challenging even for the most secure relationships and your new role as a lender requires you to be comfortable asking relevant questions.

• Why do you need the money? The answer to this question should clearly define the purpose and sets the terms of engagement.
• What is your plan for repaying the loan? This will give you insight into the prospective borrower’s intent and strategy.
• Is your credit score 700 or more? If not, what affected your score? Answers to these queries should provide a window into the prospective borrower’s circumstances and behavior.
• Why do you think I have the money to lend? The reply will signal what the prospective borrower believes about you and your financial position and sets an aspirational goal for him or her.

You may realize that a loan from you is out of the question if you don't feel comfortable asking the questions.

Is it foolish to keep my IRA invested in stocks?

Always get it in writing

codifying your agreement is a good idea if you decide to assume the role of lender. The total amount borrowed, interest rate, repayment schedule, past due payment fees and default terms are included in a legally binding promissory note.

If you want your estate to collect on your investment after your death, add the loan to your list of assets. Do you know if your employer offers a legal benefit service or secure online resources?

Don’t forget the IRS

Tax implications are carried out by family loans. The IRS issues monthly guidelines for setting interest rates on family loans. Personal lenders can't assess below- market interest rates to avoid estate and gift taxes.

It is not too young to have a will. You can take care of your family with an estate plan.

It is beneficial to have a framework in place to guide your lending terms. Interest on loans is tax deductible to the lender. If you want to set interest rates and report interest income, you need to consult your tax adviser.

Think long and hard about what is really at stake and the reward received by both parties for the risk taken when you are asked to borrow.

The co-CEO and co- founder of 2050 Wealth Partners is a certified financial planning professional. She works to amplify diversity, inclusion, equality and belonging in the financial planning profession through financial planning, writing, consulting and coaching. She was one of the Top 10 financial advisers on Investopedia in 2020 and 2021. She wants to make money for the common good.

NextAvenue.org gave permission for this article to be used.

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