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Be careful borrowing from family, friends
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ATLANTA — Now that banks have tightened their lending standards, it is more difficult to borrow money, even for those with strong credit histories. So what do you do if you need a loan? Many people are turning to friends and family to borrow funds.
Smart steps are needed to prevent the loan from damaging a good relationship.

Consider alternatives
Borrowers who fail to repay bank loans may face legal problems, but those who can’t make good on loans to friends or family can be hit not only with legal trouble but also the loss of a personal relationship. That’s why it’s a good idea to think about all options before approaching someone you’re close to for a loan. Try more than one bank, for example, or explore borrowing possibilities at credit unions or other sources. It may also be possible to cut back on spending. Instead of taking a loan or to postpone your plans for a big purchase until you have saved the money you need.

Get it in writing
One of the pitfalls of a loan between friends or family is informality. A handshake is a popular way to cement a deal, but a written document is a better idea for both sides. That’s because problems can arise when the friend lending the money expects it to be returned within a short time, while the borrower believes he or she can pay it back over an indefinite period. When lending money to a loved one, it’s often hard to insist on knowing when the loan will be paid or to ask for regular payments. To protect your relationship and your wallet, it’s best to put it in writing; the amount of the loan, when and how it will be paid off and if the borrower will pay interest. This kind of promissory note clarifies the borrower’s responsibilities and can help prevent misunderstandings. The note should be signed by both borrower and lender and each one should keep a copy.

Be realistic
While written documentation is a great idea, remember that it will not prevent potential problems. That’s why it’s important for both people to be realistic before they enter into the deal. If you know a loved one likely won’t be able to repay you, for example, offer instead to help him or her solve problems by developing a monthly budget or working out a payment plan with creditors. If you are uncertain you will be able to repay a loan, consider asking loved ones to brainstorm other borrowing options. Doing so may preserve your relationship so it is still in force long after any money problems are over.

Give honest updates
If you borrow money from a friend or family member and find that you are unable to repay it as expected, let them know about the problem right away. Explain what went wrong and when you think you’ll be able to make good. It may be a difficult conversation, but your candor and consideration will go a long way in helping to preserve the relationship.

The Georgia Society of Certified Public Accountants is a professional organization for CPAs in Georgia. The purpose of the GSCPA is to promote the study of accountancy and applicable laws, provide continuing professional education, maintain high ethical and work standards and provide information about accounting issues to the membership and the public.
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