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Monday, July 4, 2016

Giving Loan to Friends and Relatives

 


Giving a loan to kith and kin can cost you money and a relationship.
 
When 32-year-old Sourabh Thanekar's friend desper ately sought money from him for a medical emer gency in the family, the Ahmednagar-based finance executive did not think twice about parting with `40,000 immediately. Two days later, a shocked Thanekar realised his friend had lied and had taken the money only to buy the latest model of a high-end smartphone.
 

While Thanekar was unfortunate enough to have been conned by someone he considered a friend, lending money to friends and relatives is common practice in our country.From small hand loans given to meet real and imagined emergencies to large sums meant for setting up business ventures, money changes hands with little or no paperwork and an often misplaced sense of trust.The open-ended nature of the agreement usually ends in defaults, with money lost and a relationship broken in the process. While it is difficult to say no to requests for money from loved ones, here's how you can handle the situation without burning any bridges.

 

Before you lend money, ask yourself if you can afford it. Remember that you are unlikely to getthe money back for a long time to come, if at all. Figure out if you can deal with an emergency with whatever you have left. If you are working towards a financial goal such as buying a house or saving for your child's education, consider to wha extent your generosity can set your plans back.

 

Keep 5% of your savings in liquid funds to help dear ones in the event of a financial emergency. Allocating a fixed portion of your money to cater to such situations won't affect your other goals.

 

Even if you know the borrower well, do a due diligence. Don't accept their reasons for needing the money at face value, like Thanekar did. Mumbai-based IT engineer Manoj Kalwar found himself in a similar situ ation. Hounded by a friend who wanted money for a family member's medical treatment, Kalwar lent him `40,000 over three months in 2014. Later he learnt that his friend had taken `1 lakh on the same pretext for some others as well. Only, no one ill in his family was ill. He had blown the money on luxuries. Not the one to give up, Kalwar pursued his friend for six months and recovered the amount. "I keep my emotions aside while lending money now. I also cross-check with common friends and relatives before I lend,.

 

According to Viral Bhatt, Founder and Advisor, Money Mantra, compulsive borrowers are to be avoided. Learn to turn down requests after lending money a couple of times. Also, politely ask them to first repay the outstanding amount when they approach you for new loans

 

Another factor to consider is how close you are to the person seeking the loan. Ask yourself how long you have known the person and how often you interact. It will help you decide whether the person is really a close friend or an acquaintance." The reasons for borrowing can appear pressing sometimes. IT professional Koyel Ghosh found herself helping her friend, who had lost a job, pay off an education loan EMI of `25,000. She never got the money back. Check the financial status of the borrower before you lend.

 

As the lender you have the right to ask what the money is needed for. Once you are sure the need is genuine, consider the borrower's ability to repay. If they are working, find out how much they earn and what other financial commitments they have. If they are struggling to pay bills or lenders, the chances of you getting your money back are low.

 

A common problem faced by most lenders is the inability to ask for their money back.Pune-based engineer Shaunak Potdar lent a friend `50,000 as down-payment for a car.He never saw the money again. When the transaction is among friends and family, the borrower rarely feels a sense of urgency to repay the loan. As there is no deadline, repayment becomes last priority. There is no late payment fee, no stiff interest rates or penalties. The borrower has no motivation to take the repayment seriously. When I lend today, I politely discuss the repayment schedule so that the borrower understands that I need the money in future.

 

When you are approached for money, don't part with it immediately. Buy time to verify the need. During that time, the borrower could approach others for help and get it, bringing down the quantum of loan he needs from you. Even then, do not give the entire amount sought. Give 30% to 40% of the requested amount. That way, in case the borrower fails to repay, you will not be left with a massive bad debt.

Sometimes a lender unwittingly plays into the hands of compulsive borrowers. For instance, pleas for loans from distant relatives and acquaintances. Ankur Kapur, Founder, Ankur Kapur Advisory, explains, The reason why the borrower is knocking on your door could be your lavish lifestyle and habit of discussing your financial status in social gatherings. Word spreads quickly and unscrupulous elements try to cash in. When distant relatives or colleagues seek financial help, try to resolve the issue for them rather than helping them to take an easy way out with a loan from you. Advise them to take loans against fixed deposits or gold at low interest rates from NBFCs. Also explain the importance of contingency funds. You can play mentor to a colleague who needs money. Ask your colleague to approach HR for advance salary if the amount required is large, If there is no financial awareness among colleagues, arrange a workshop on financial planning for them.

 

In this age of startups, seeking money from relatives to start a venture is common. This not only helps the borrower avoid high interest bank loans, but also serves as a safety net against harsh penalties, should the business fail, making repayment difficult. In 2014, a friend of Mumbai-based entrepreneur Rohan Dhulla approached him for `2.5 lakh to set up a business. Dhulla agreed to lend. An agreement was drawn up, whereby Dhulla got 15% stake in the company, and the loan had to be returned within two years with 10% interest. In the first five months, Dhulla got back `55,000 before the venture sank. Now he is contemplating buying out his friend's share and getting the business back on track.

 

When you are asked to help out for a social cause, be doubly wary. Mumbai-based HR consultant Naina Salian was approached by a friend to help an NGO feed the poor. Salian arranged for `60,000 in cash. The so-called friend pocketed the money and the NGO got nothing. Salian now makes online transfers directly to such organisations. Check whether the NGO is registered before donating. Collect the receipt to claim tax deduction under Section 80G.

 

If a friend or relative asks you to be guarantor when they seek bank loans, don't agree unless you are sure about the borrower's ability to repay. If the borrower defaults, the bank will recover the amount from you.

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