When you receive a "how are you?" message from out of the blue, what follows oftentimes is a request for a favor or a loan. While it is easy to refuse casual acquaintances, you might take a while to reply when the person is someone you care about.
Lending money is tricky, even more so when it involves friends and family as both parties see it more as a personal transaction. This shouldn't be the case as borrowing money is a business transaction and should in fact come with interest, said financial planner and YouTube video creator Salve Duplito.
"No one should be obligated to lend to relatives. Any one can say no and the decision to explain why is purely personal. If lender chooses not to explain why he will not lend, the borrower must accept with no misgivings and move on," Duplito told reportr.
"It should ALWAYS still be a business transaction, with a contract (I call this a love letter) that includes full amount of loan, term of loan, and an interest. Any loan that is interest free is not good for both borrower and lender," she said.
Here's your guide to lending money to friends and family:
How much interest should be charged? Duplito suggests pricing the interest between corporate debt and a personal loan. At current rates, it's higher than 5% per year but no more than 10%.
Why charge interest? If a loan is interest free, studies have shown that borrowers are less likely to prioritize paying them, Duplito said.
What if the money issue blows up? Family members can hire a mediator, a financial adviser, to help them sort out the problem, Duplito said. This will "remind both parties that money is never the most important thing. But knowing how to handle it allows you to do the things that are most important," she said.
"There are ways to resolve money concerns that will not scar a family for life.," she said. Knowing how to navigate financial matters with loved ones "allows you to do the things that are most important," she said.
Duplito dishes out smart money advice on her YouTube channel. She was along-time host of ANC's On the Money. Here's one of her most recent vlogs that talk about debt.
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