Here's The Proper Etiquette For Paying Someone Back

 paying back a personal loan

Recently, I wrote about reasons why you should think twice before borrowing money from family and friends. Now, in this piece, we’ll explore the proper etiquette for paying someone back — because, once you have the money you borrowed in hand, say, $1000, it’s a whole other story when it comes time to come up with those funds and return them to their rightful owner.

While some people loan others money and never expect to see it again, others think you absolutely should get every cent back. Maggie Germano, CEO and founder of Maggie Germano Financial Coaching, is one of those people. “I don’t know about you, but if I lend someone money, I will probably need them to pay me back within a month or so — I don’t have enough disposable income to miss larger sums of money for long periods of time,” she says. “If you think it’s going to take you months or years to pay back the money you need, you should think twice before borrowing from a loved one.” 

Jamie Wharton, Marketing Coordinator at Earnest.com, also warns that borrowing money from friends and family can be a tricky situation. “You want to be sure you’ve explored all other options before turning to your loved ones for a loan,” she says. “Plus, when it comes to the amount they can afford to lend you, appreciate whatever they’re willing to help you out with. Don’t ask for more money when they’re already doing you a great favor.”

That said, once you have the loan, what if you still find yourself low on funds after you borrow the money? How the heck can you afford to pay your friend or family member back when you still have rent and other fixed expenses to pay? After all, unlike other loans you take out and have problems repaying, your friend probably won’t freeze your bank account or repossess your car. If you’re looking for etiquette tips on how you can — and should — pay someone back, some finance experts have some ideas.

Create A Payment Schedule

Like anything in life, deadlines are the key to productivity, and that goes for paying someone back, too. “Transparency is everything here,” Germano says. “Draw up a repayment agreement that outlines the payment schedule, along with payment amounts and the method that payment will be made. Make sure both of you have a copy of the agreement, so no one gets confused or misinformed.”

Ash Exantus, Director of Financial Education and Financial Empowerment Coach at BankMobile, agrees about having a payment schedule in place. “Borrowing money from a friend, family member, or acquaintance is a complicated transaction because money can most certainly put a strain on any relationship,” he says. “Because of this, before you even borrow money from someone, I would suggest that an agreement is put into writing to avoid any confusion down the line. Also, it is important that you explain how you plan to pay your debt back with specific time frames.”

Set Up Automatic Payments Through Your Bank

Just like other bills you pay, you probably automate many of them so you don’t have to worry about paying bills late. When it comes to repaying your friend or family member, Germano suggests setting up automatic payments through your bank. “Most banks have a feature that allows you to set up recurring payments to other bank accounts,” she says. “Make sure the person you’re paying back is happy with the time frame and details.”

I couldn’t agree more with Germano. Personally, I’ve used Chase QuickPay with Zelle when I’ve had to pay a friend back — we were abroad and he was the only one of the three of us whose ATM card did not charge foreign transaction fees or ATM fees. To put things in perspective, let’s say you’re on vacation and take $100 out of an ATM — you may have to pay up to $15 in fees (about $10 as a foreign transaction fee and $5 for using an ATM not affiliated with your bank). So, to help our other friend and me avoid extraneous bank charges, he insisted on using his card for the week and then we all set up an automatic payment plan with him via Chase. It could not have been easier.

Consider Paying Your Friend Or Family Member Interest

I know, you may be thinking — interest?! Add interest?! But some finance experts believe that this is essential when paying your friend or family member back. After all, they did you a big favor. “If you are borrowing money that you cannot pay back in one lump sum and need to break it down in installments, then you should include interest in the pay-back to compensate for the wait,” Exantus says. However, it is a case-by-case basis. “If you plan to pay all of the loan back in a month or less, then interest may not be required,” he says.

Wharton agrees. “Insist on paying interest on the loan they’re giving you so it doesn’t seem like you’re asking for a gift — ask what rate they’re comfortable with, but offer no less than two percent,” she says. “The person is being extremely generous and providing means that you don’t have, so offering to pay interest will show your gratitude.”

In Addition To Or Instead Of Interest, Offer A Piece Of Collateral

Let’s say you cannot pay your friend or family member back right away, but you want to show good faith that you will pay — you just don’t know when. And, worst-case scenario, if you don’t ever pay them back, they will at least have whatever asset you give them. “If the amount is substantial, it may be a good idea to offer a piece of collateral to ease the thought that you possibly won’t pay your debt back,” Exantus says.

If You Need To Miss A Payment, Be Honest With The Lender

Missing payments is the worst, especially when it’s to a friend or family member who loaned you money. But it may happen. “If there is ever a month where you can’t make your usual payment, be honest,” Germano says. “If this person was willing to loan you money, hopefully, they’ll be understanding if something comes up that prevents you from making a payment. The worst thing you can do is not pay and not say anything about it. You want to show that you respect this person and you take the repayment seriously, so be open and honest if anything gets in the way.”

Pay Off The Loan As Soon As Possible

No one likes having something stressful — such as owing someone money — hanging over their head, so the sooner you pay off your debt, the better. “You’ll want to pay your family member or friend back as soon as you can afford to, and it will increase your credibility as a friend,” Wharton says. “If you show you’re a trustworthy person, you won’t jeopardize your relationship with this person over money.”

At the end of the day, owing someone money is not fun, and Wharton strongly advises against it, if possible. “Before asking your family and friends for money, track your spending to see where you can cut back on your monthly expenses and create a stricter budget,” she says. “Also, see if you can take out a small, low-interest personal loan from a bank or lending company, and ask for a raise at work if you’re due.”