When you have lent a friend or family member money, and they are not paying you back, you will likely have to rely upon your negotiation skills to try and recover the debt. This can be tedious and, depending on the nature of the relationship, can either bring you closer or create severe tension between you. So how you handle it will most likely decide the situation’s outcome.
Read on for tips on how you can recover a personal loan without damaging the relationship in the long term if you have lent a family member or a friend money.
Should You Lend Money to Family and Friends?
If you’re struggling to decide whether you should lend money to a family member or friend, read our guide here.
Tips for Collecting Borrowed Money Back
Avoid Aggression
Always avoid using unnecessary aggression when asking for your money back. Being aggressive, using verbal abuse, or guilt-tripping the person into giving the money back will create tension and most likely disempower them further.
Although it may be frustrating when they’re not meeting payments and missing deadlines, you should try firmness and persistence when asking for the money back.
Ask for Updates
Before asking them about repayments, ask for an update on whatever they borrowed the money for. This provides a gentle way of easing into the conversation. For example, “How is your car repair going anyway? Have they fixed it yet?”
Give Gentle Reminders
It’s important to approach the situation with a balance of firmness and straightforwardness, much like a business transaction. For example, “When do you think you can repay the money you owe me?”
Express Urgency
When asking politely about when the money will be paid back, add a reason or reasons why you need the money back. This will hasten the borrower, giving them a sense of urgency for their payments.
For example, highlight your own financial situation by stating: “My children’s school fees are due soon, so I need that money right now.”
Add Deadlines
Decide upon a deadline for the repayment of the entire loan. If the date is nearing, meet them in person to remind them about repaying the loan. If they avoid you, be firm about setting the meeting. When you meet with them, politely remind them of the deadline and any penalties incurred as stated in the Loan Agreement.
For example, “Can you pay me back in two weeks, on the first of the month? My rent is due, and I could use that cash back.”
Offer Payment Installments
Sometimes the other person may be unable to pay you back all at once, so agreeing on an installment payment plan can be a good compromise. Meeting in the middle ground means both parties achieve some progress in the situation; you get some of the money back, and they gradually alleviate their debt burden.
For example, “How about you pay me $100 on the 1st of every month?”
If All Else Fails
If you feel like you may never get the loaned money back, here are some alternatives to consider.
Bartering
Suggest that instead of monetary payment, they can give you something of theirs of the same value. Perhaps they have an old guitar or TV they don’t use they could provide you with.
You could suggest they have a garage sale or sell some things on eBay or Craigslist to raise funds to repay the loan. A joint garage sale may organize and jolt them into action to repay the loan.
Drinks on Them
Go out with them for a few beers, dinners, or nights out, whereby they treat you until the amount owed has been repaid.
This will depend on the money they borrowed, but it would be applicable for amounts less than $500. This means you get to hang out with your friend and show your support while still getting compensation for the loan.
Taking Legal Action
Assess your relationship before landing your foot on this step. Does it warrant taking legal action for the amount owed? Does money mean more to you than relationship? This may depend on the amount of money.
If you feel like the relationship means more than the money (hopefully, it does), continue with the steps above to try and recover the loan. Remember that if they haven’t been paying you back for some time, they may never pay you back, and you may need legal action.
► READ MORE: How to Enforce a Promissory Note
In Hindsight
It is generally advisable that you avoid lending money to friends and family. But suppose you choose to, and they have agreed to sign an IOU form, promissory note, or loan agreement. In that case, you are in a slightly better situation as these can be used as evidence if you decide to take them to court.
Either way, you will most likely need to have conversations about the loan repayments, especially if installments or deadlines are being missed.
The last thing you need is for the loan to create a rift in the relationship or divisions in your family or friendship groups. Avoid issues in the future when you lend money again and be clear about your loan terms.