Pitfalls to avoid, guidelines of lending between family and friends to prevent a relationship regrets

The practice of family and friends lending has been ongoing since money has existed as a currency. At times in our life, our network ends up being our last resort for borrowing money. Though this was not always the case and is still not the case for a lot of people. A lot of people prefer to lend and borrow within their network first, because they understand that this practice has benefits. There is a certain protocol on how to do this right and if done correctly, this process of lending between family and friends can help you get ahead of the other modes of lending. Let us walk through some tips and tricks to help you avoid any pitfalls that might end up affecting your relationship.

Ask a friend or family member for money

This should be a conversation that is clear and transparent. A clear ask needs to be made to the lender detailing why the money is needed, how it will be paid back and when. Most times, people do not clarify details and people don’t even realize if the money is being taken as a loan or as a gift. But both borrower and lender owe it to each other to be clear of this transaction and be given a moment to decide if this request even works for them.

Negotiate the loan with a family member or friend

Once an ask for a loan is made, the lender and borrower should come to mutual agreement on payback terms. When should the payments be made, how often, and how much interest rate and duration should be decided. Feel free to speak up if a certain interest rate does not work for you and you would rather not be doing this transaction if the terms don't work for you. Once again, clarity in conversation is important.

Document your loan with a family member or friend

Use Namma’s loan agreement to clearly document your loan agreement with your terms and e-sign it with your respective email addresses, phone numbers and other details. This way you are creating a solid legal proof that your loan transaction happened and both parties are involved and obligated. A loan agreement is also a way for you as a borrower and lender to now be in a new relationship that has been documented. Such a contract gives you both dignity and rights in the transaction. It also helps to have proof for tax/interest purposes.

Communicate on time

Follow the terms of the loan. Your loan agreement documents when the lender will give the borrower the loan by. It also documents when the paybacks will happen. Stay true to these arrangements and keep the other party informed along the way. Namma’s amortized schedule builds up these payment amounts and dates for you. You now can use this schedule to come in and report if the payment has happened - put a textual note on how it was done and when. Such clarity shows that you both are taking your contract seriously and want to abide by it to respect the other person and your written word.

Pay back your loan early if possible

If you can possibly pay back early, do so. Paying back early on a loan is a sign of good credibility and this also shows your lender you are financially able to and therefore does help build their confidence and comfort level in you. Namma’s schedule does allow your lender to mark additional principal with each payment and this helps re-amortize the remaining loan financially benefiting the borrower. Namma generates an amortized payback schedule based on the number of months of payback, loan amount and loan interest is decided. This is based on the Annuity formula for amortized payback.

Offer collateral to your lender as a guarantee

As a borrower, offer some collateral to your lender as a token of guarantee that you intend to pay back the loan. This can be put into the additional clause of our loan agreement in your own words. As an example, you could offer your car or some services that you can provide for them which have tangible monetary value just in case you cannot pay back the loan. Make sure your lender is comfortable with this collateral and finds value in it too.

Keep your lender-borrower relationship professional

Now that you have made a contract, signed on it and are keeping true to it, don’t bring up this relationship in other contexts. E.g. Not everyone you both know needs to know about this new aspect of your relationship. This is a decision that has been made between both of you and therefore does not need to be scrutinized or judged by your common friends and family members. So be judicious about this side of involving other parties into your relationship.

Report late payments and act on them

First of all report on some form of third party schedule that these payments are late or delayed. This way you can both keep track with a neutral software with possible documentation of payment transaction ids that can show the history of payments made towards the loan. If payments are late, please notify your lender beforehand and make a note too that a payment is running late and when it will be given by. Generally loan documents have provisions on what your grace period is for this payment. Namma’s loan agreement gives you 10 days to make a payment. If it is not made before that deadline, the lender is given the right to invoke the default clause and take legal action against the borrower.

We understand that between family and friends transactions we do not want them to end badly, so we encourage good communication to help it not get to that stage. But if it does, the printed loan agreement can be used as proof in court of a transaction with documentation or lack thereof on expected payments.

To summarize, this space is nuanced, with lots of psychology and emotional barriers to overcome. So keeping this rational, honest and transparent is the best way to make these loans work in your best interest.

Disclaimer: Namma is not your legal advisor, tax advisor or lawyer. Our blogs are based on product research done by our team with our customers and our service is meant to make borrowing and lending between family and friends less awkward and more uplifting.