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What to consider before lending money to family and friends
When your best friend views your
nest egg as a source of start-up funds for his latest business venture, or your
nephew hits you up for a car loan, your first impulse may be to reach into your
bank account to help. But it's a fact that loans to family and friends often
end up straining both finances and relationships. As Shakespeare said,
"Loan oft loses both itself and friend." In other words, if you lend
money to friends, you often don't get paid back, and the friendship itself may
disintegrate.
It's best to consider a loan to
someone you love as an "arm's length" transaction. If you're
pondering such a loan, keep the following in mind:
* You can just say "no."
It's your money, after all. Do you really want to raid an emergency fund or dip
into your child's college account to finance a friend's business idea? Think
like a bank. It's reasonable to ask tough questions about the person's bank
accounts, potential sources of income, planned use of loan proceeds, and
spending habits before extending credit.
* Consider a gift. If you're
comfortable sharing your resources, you may want to provide a monetary gift
with no strings attached. In many cases, this is the best solution because
neither you nor your friend expect the money to be paid back. Unlike a loan, this
type of arrangement can forestall misunderstandings and hurt feelings later on.
Of course, you should not give money if doing so would unduly strain your own
finances.
* Formalize loans. If you decide to
lend more than a small amount to a friend or family member, it's generally best
to draft a written agreement. This can be as simple as filling out a promissory
note (available online or at office supply stores). Such forms spell out the
basic terms of the loan -- amount, interest rate, payback period -- and provide
some limited protection should you and the borrower end up in small claims
court. Another recent innovation is the use of direct lending (also called
social lending or peer-to-peer lending) websites to facilitate loans between
family and friends. For a fee, such sites can prepare loan documentation, send
payment reminders, issue regular reports, even facilitate electronic fund
transfers. If the loan involves a significant amount of money, check with your
attorney.
Remember: Many personal relationships
have been damaged when loans go awry. So proceed with caution.
Posted in general
When you go out and eat, put gas in your car or pay for your business expenses, I’m going to assume that you are either using a credit card or a debit card. In your mind, you might think they are the same. But there are differences that you need to be aware of.
Hello, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.
Here are some differences that you need to be aware of:
- Cash availability and fees
With a credit card, the money is not immediately taken out from your bank account. And as long as you pay back the credit card company within the allowed period, you won't be charged interest on the money owed. And you don't want to make a late payment – interest can build up quickly on credit cards.
In contrast, debit cards are linked to your personal bank account, so you're using your own money and the charges are automatically deducted from your account. However, you might be charged extra fees on top of interest for any overdrafts.
- Personal finance and budgeting
Earl Wilson said that there are three kinds of people: “The haves, the have-nots and the have-not paid what they bought.” You don’t want to be in the last group!
With credit cards, you might tend to overspend since you have available cash in a form of a personal loan. On the other hand, because you don't carry a balance on the debit card, you're more likely to stick with your budget and not overspend.
- Consumer liability protection
Federal laws protect you in the event you need to dispute credit card charges and usually cap your liability at $50. Debit cards offer fewer protections than credit cards, including a sliding scale of liability depending on when you notify your financial institution.
Which card is best for you? The answer is generally a mix of the two is a good compromise. You can use a credit card wisely to bolster your credit, while still paying for everyday purchases with a debit card.
If you like to learn more, click the link lowermytaxnow.com and sign-in to receive my weekly blog.
Until then, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.co
Last Updated by Admin on 2016-08-17 05:43:08 PM