When looking to lend money to others, there are many aspects to consider before loaning out your money. Whilst you may have plenty to share and want to help out others where you can, doing this regularly and with people you don’t necessarily know isn’t without its issues. Lending small amounts to friends or family is one thing, but with the rising popularity of peer-to-peer (P2P) lending, more people are becoming interested in loaning their own cash and earning interest as a lender. Amongst the many rules and regulations, what are the unwritten rules you need to be aware of? Here are some to consider when loaning money.
Ensure you can afford it
Firstly, if you do not have the available funds to lend, you should carefully rethink your options. You may have savings, but would you want to lend the majority or all of this? Lending money can be risky, that’s why traditional lenders have credit and affordability checks in place before approving a loan. Whether it’s a short term loan to cover a small emergency expense or a larger personal loan to help those purchasing big-ticket items, lenders only do so if they have the available assets. Being your own lender is like any investment, so you need to be prepared to lose money as well as earn it. However much the loan you are willing to provide, ensure it doesn’t impact your essential outgoings.
Put your interests first
You need to lend money for the right reasons, and putting your interests first will help to focus on what’s important. As you will still have essential bills to maintain, loaning money at a detriment to your finances will not help in the long term. Whilst you may be helping someone out, it should be on your terms and have a pre-agreed plan of repayment. Without this, you may not receive timely repayment and could lose money. Like any entrepreneur, you’ll want to keep focus on your personal finances at the same time as your business, otherwise, financial difficulties can quickly arise.
Lend only to people you trust
If you are lending to friends and family, you’ll have a good idea of who you can trust. It will also mean you won’t be taken advantage of just because they know you or are related, ensuring you receive repayment on an agreed timescale. It may seem obvious, but loaning money to people you do not trust can quickly lead to disappointment. This is where putting your agreement in writing can ensure whilst you want to help, you’ll have proof if something goes wrong and you need to escalate. Trust goes both ways, so the recipient of your loan shouldn’t be surprised you want the agreement documented and signed, especially when lending a substantial amount.
Be cautious when lending credit rather than cash
Depending on how much you are prepared to loan, some people may borrow money on behalf of someone else. This can involve taking out a large sum of money or lending a credit card with a defined limit. For example, if someone has a poor credit rating and you want to help them by taking out a loan they couldn’t otherwise get. Unlike savings which are your money, using your credit to help others will impact your credit rating and will be in your name. If they do not pay you in time, the loan cannot be paid on time. Lending credit is much riskier than using your savings or available funds, so be sure you are happy with this before continuing. Where possible, look to loan only your own money.
