Today, we will continue our video series about lending money to family and friends. And I want to cover two points today…
The first is Factoring in incentives: The lender may want to consider including incentives in the contract to reinforce positive behaviors. One reward could be forgiving the final few payments of the loan if payments have consistently been made on schedule. There can also be nonfinancial incentives, such as taking the person to a sporting event, if the loan is paid back early. The perks don’t need to be financially onerous on the lender, but may help encourage prudent financial habits for the borrower.
The final point, and the most important one is Knowing when to say no: If the family member does not agree to the terms you establish—and you can’t afford or are unwilling to gift the money—then saying no might be the best decision. Yes, it will be difficult to withhold financial support for a loved one who is struggling. But lending to a spendthrift who isn’t committed to repairing their finances could land you in a financially vulnerable situation, which doesn’t help anybody.
The framework I laid out in this series of videos might seem onerous, but it protects the lender and offers the borrower a responsible, viable path to recovery.
You can WATCH the full video here.