Can I Lend Money to a Friend and Charge Interest?
The wise say no one is an island. At one point we all need help from others. This is very true when it comes to financial matters. Several conditions can force you to make a borrowing decision. For instance, you may want to inject more funds to facilitate the operations of your business. Sometimes emergencies knock us down at the time least expected. In such circumstances, borrowing is wise. There are so many reasons why borrowing funds may be justified. The question is, where are going to borrow?
It is good to remember that borrowing money comes at a cost, which is commonly referred to as interest. Lenders charge different interest rates depending on their terms and conditions of lending. Still, other conditions revolving around the borrower play a significant rate in determining the interest charged on a loan, for instance, your credit history, and the overall score are the main factors lenders assess in determining whether to approve your application and the rate to charge you.
Have you ever heard of debt-to-income ratio? This yet another key variable that lenders use to determine your creditworthiness and the interest rates to be charged on a loan. Today we want to focus on lending friends and whether you should charge them interest.
Table of Contents
Should You Lend Friends?
As we mentioned at the outset, no one is an island. There is a possibility of a friend approaching you for help. Maybe one is overwhelmed with debts and really want to keep up with payments. What if a friend is in dire need and cannot be approved for an instant loan because of poor credit or other factors? Again, their many reasons why friends turn to each other for financial help. The question is, should you lend? Well, there are so many factors to consider. Depending on the situation, it may be appropriate or inappropriate to lend. Lend discuss both decisions.
Why You Should Lend
Sooner or later you may need help also
This is exactly what we mean when we say no one is an island. Today itis your friend and yourself. So why should you lend? Because your time will come, and when it does, you will need a friend to be there for you. It is only good that you also be there for him or her.
Lending strengthens relationships
Come to think of it–why should I turn to you for help? Because I trust you and see you as a pillar of strength in this hard time. Should you betray that trust? If you have what it takes to help, do not hesitate. There is one Biblical principle that says “do not resist giving friends the help they need if your hand is able.” Being there for one another is the basis of friendship.
There is help in giving
This also another golden principle that applies to financial matters. There is always a happy feeling when we help others. Think of a friend who borrows to finance a critical medication! You may indeed help someone save a life. Giving makes you happy. It is a nice way of telling friends you love them. While the three reasons are convincing, there are moral-based. Should lend because you feel you are morally obligated to do that? It may not necessary not to lend.
Why You Should Not Lend
Sometimes borrows do not prioritize repaying
In many cases, borrowers do not see the urgency of repaying the loan. Unless you sign a contract with repayment dates, settling the loan is often the last priority for some borrowers. Late payment cannot have some negative impacts on the borrower, such as lowering his or her score. Honestly, there is always a lack of motivation to repay on the borrowers’ side.
It is challenging to ask for repayments
Asking a friend to repay is difficult and that is why people do not consider lending to friends. As a lender like Instant Loan they’d always put the interest of the borrower before your own and asking for payment may just feel awkward. As you keep worrying about the repayment, you may stop all the communications in an attempt to avoid the loan topic. The borrower may even get confused and get hurt. To avoid compromising friendships and other relationships, many avoid lending to friends and family members.
Lending makes one a slave
“The borrower is the slave of the lender.” These are the words of one Biblical proverb (Proverbs 22:7). Do you agree with this claim? Recently a friend lent me some money and felt I needed to please her and do whatever she wanted. I didn’t see any reason for opposing her. No one would want his or her borrower to feel the same. So, to avoid such discomforts, some feel justified not to lend money to friends.
There are higher chances of returning once you lend for the first time
Friends may always look for you whenever they are in need. Other people may also be tempted to borrow from you. Do not let yourself be in a state of unceasing lending. This can ruin your financial life.• Instead of lending, it is wise to help with alternative ways of fixing the problem. What if you will not be in a position to lend next time? I don’t mean you should turn out to be a mean person who cannot help others. Realistically, it may be inappropriate to lend. What about charging interest?
Should you charge interest?
While it may sound unreasonable to charge interest on money lent to friends and family members, it may be important for you. There are so many risks involved in this situation and it is important to take them into account before making a lending decision. You may have to pay penalties in theIRS. Remember there is a yearly limit tax-free gift. So, to avoid legal tax liabilities, charge interest. Also, to show commitment, some friends include interest in the terms of lending. It is important for borrowers to show themselves thankful and the best way to do that is paying interest on the amount borrowed. Lastly, consider the time value of money. The amount borrowed today may have less purchasing power in the future. How then can you indemnify the lender? Pay interest. It is a nice way of showing you appreciate the help given. Besides, can you get a loan from banks or other institutions without paying interest? It is very unlikely.
The Bottom Line
Should you lend to friends? There are several factors to consider before making a decision. We have briefly discussed these reasons. Should you charge interest? While it may sound ridiculous, their regulations demand you charge interest. We will hope this discussion has been helpful. We will be glad to see your response. Thank you!
Stop Worrying About Money and Regain Control
Join 5,000+ others to get access to free printables to help you manage your monthly bills, reduce expenses, pay off debt, and more. Receive just two emails per month with exclusive content to help you on your journey.