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Debt Management Basics
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Borrowing from family or friends

When people find themselves in a money crunch, sometimes the natural reaction is to turn to family for help. Parents, grandparents and siblings often are willing to lend a financial hand via a loan.

If you are asking for a loan of more than $100, you need to know the answers to at least three key questions:

•  Why do you need the money?
•  How do you expect to pay this back?
•  What are you doing so this doesn't happen again?

If you can't answer these questions honestly, you are not ready to ask for a loan.

If you can answer these questions, you need to know how to minimize the potential for resentment and destructive situations. These tips will help.

Know from whom you borrow

Ask yourself, "If I lose the money, what will be the outcome?" Relatives for whom money is an obvious emotional issue or those who really can't afford to lose anything are not good lending candidates.

Put everything in writing

It may be sufficient in a very simple transaction to write a letter that specifies the terms of the agreement. But the best way may be to get a lawyer involved, particularly if it is a significant sum of money. That protects both sides.

Guide for setting up a pay-back plan

While a short-term loan of a couple hundred dollars might be arranged with a hug or a handshake, larger loans should have a more formal structure, say financial experts.

When you record the loan, make sure to include:
  • The names of the lender and borrower
  • The date of the loan initiation
  • The amount
  • The date by which the loan is to be repaid
  • The interest rate, if one is applied
  • The number of payments
  • How often payments are to be made (weekly, biweekly, monthly), and
  • The minimum amount to be paid.

 

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