While it's admirable to want to support friends and family in financial straits, the reality is that lending money to them can be fraught with risks. One of these risks is the possibility of never receiving payback, even if a formal agreement has been established. The complexities of retrieving your money might become insurmountable.
Before handing over any money, engage in a frank discussion with the potential borrower about your concerns and expectations around repayment. Inconsistencies or obscurities in repayment terms can trigger relationship tensions. Moreover, if the loan is defaulted or delayed, it could sow seeds of bitterness and resentment.
Tax consequences are another consideration. If you choose to impose an interest fee, the earned amount may be classified as ordinary income, requiring set aside funds in anticipation of taxes. Furthermore, if you extend an interest-free loan exceeding $18,000, you could be obliged to file a gift tax return.
Lending money to one person could set an unwanted precedent that you're an open cash source. This could invite requests for financial help from other acquaintances or prompt repeated loan requests from the initial borrower. To mitigate this, it's crucial to establish distinct boundaries before agreeing to any loan arrangement.
Always carefully ponder before deciding to lend money to friends and family. Weigh the risks, clarify your terms, and ascertain whether you can really afford to lend the sum. Understanding these facets enables you to make more informed decisions and better protect your relationships and finances.