How To Protect Your Relationship

There are three things you can do to make sure that a loan between relatives or friends doesn't jeopardize relationships.

Make sure the loan is right for all parties. The loan needs to be sound both on financial and relationship terms. First, make sure the lender can honestly afford the loan, and that the borrower is serious about repayment. Nothing makes a relationship suffer more than a private borrower who doesn't even try to repay.

Make sure the relationship can handle the loan. If you think the loan will put undue power on the lender at the expense of the borrower, think twice. Also, consider how the loan might be viewed by relatives that might learn of it. Especially make sure that any spouses or partners are a part of the decision. For more on multiple loans within a family, see Managing 'the family bank' .

Properly document the agreement. Even deals with friends should be hard and fast, written up with an expectation of repayment. This is to make sure both parties to the loan fully understand its implications.

It also is necessary so that other parties - the IRS, your accountant, family members - who may have reason to know about the loan, can properly understand the agreement.

Have a neutral third party service the loan. The job of the 3 rd party is to manage the loan repayment, resolve any issues along the way over late or missed payments, and provide year-end reports. CircleLending was founded on the hypothesis - proven true again and again - that having a private loan professionally managed by a third party significantly reduces the chance the loan will default, thus reducing the chance of a bad ending.

In addition to doing the work of documenting and managing the loan, a neutral 3 rd party creates a buffer between the personal and the business relationships. For example, if a borrower starts missing payments, the lender is put in the position of needing to contact the borrower about the missed payments and discuss the need to get back on track. A simple task such as this can be a sensitive and loaded encounter when the parties have a personal relationship, and can create stress that didn't exist before. But the friendly client services team at Virgin Money can do that work in a way that is all about the loan, not the relationship.

We can also play "the bad guy", reminding delinquent borrowers of the threat of collection and the negative impact it can have on their credit report. Similarly, Virgin Money can mediate the process of getting a loan back on track, and can change or restructure payment schedules to accommodate a changed circumstance that has made it hard for the borrower to keep up with the initial schedule.

Simply put, it's easier for borrowers to hear "you're behind and you better catch up!" from a third party than from a parent, other relative or friend.