Personal Loans: Tips for Keeping the Peace When Things Don’t Go As Planned
Many of us have official obligations like credit card debt and less formal debts to friends or family members that include personal loans. Usually, one of these personal loans isn’t structured by a formalized loan agreement, but it can be equally important to your reputation, relationships and financial budget to treat personal loans just as seriously as you do contractual obligations for paying off credit card debt and other loan obligations. Family borrowing often comes with hidden agendas and generates unexpected consequences, so the following financial best practices for keeping peace and fulfilling your commitments make sense:
Balancing the Demands of Legal Creditors with Personal Financial Obligations
Unfortunately, informal family-style loans are usually the first casualties when people get in financial trouble and can’t pay their debts. It’s just human nature to put off friends or family members when you’ve got legal creditors aggressively pursuing collection activities. However, it can also be draining and frustrating when friends or family members get upset over nonpayment of loans. These disputes could ruin relationships, generate lifelong enmities, preclude any future borrowing–even in extreme emergencies–and even result in legal actions from offended friends or family members. The best strategy for balancing legal and personal debts involves talking to the lenders, balancing repayments as fairly as possible, guaranteeing to pay interest on loans that can’t be immediately repaid and cutting personal expenses to free cash. Other options for meeting all your obligations include using income tax returns to make up shortfalls, taking out a consolidation loan, borrowing against life insurance and accessing retirement accounts.
Paying Interest to Friends and Family Members Is a Fair Strategy
Photo by Priscilla Du Preez on Unsplash
Paying interest is critical to maintaining a professional relationship when borrowing money from friends and family members. It’s entirely possible to manage awkward conversations, delayed payments, missed payments and other considerations if the lender is getting full value through a reasonable rate of interest. if borrowing large amounts for business or a mortgage, the IRS fully expects you to pay a normal rate of interest. Regardless of how flush the lender might be, he or she could be earning a return on the money, so it’s only fair to offer to pay interest. In some cases, a good friend or parent might choose to offer a loan at little or no interest as an accommodation. Each case is different based on the relationship, loan amount, repayment period and purpose of the loan. It’s fair to offer to pay interest regardless; the lender can always refuse to charge interest or lower the rate.
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