Economic crisis: 4 tips to lend money to a friend in times of coronavirus (that can help you avoid a fight)

 

The covid-19 pandemic will cause the "worst recession in the last 100 years" in Latin America, according to estimates from the United Nations (UN) released in mid-July.

The projection estimates a fall in the economic growth of 9.1%, which will have a direct impact on rising unemployment and poverty.

The nosedive in the tourism sector, together with a drop in exports and the arrival of remittances, are creating serious difficulties that are gradually becoming visible in the family budget.

Unemployment is expected to climb to more than 13% this year, while informal workers - who live from day to day and have no social protection - will continue to get up in the morning without knowing how they will generate resources to survive.

And although the Latin American Federation of Banks, FELABAN still does not have consolidated data on the rise in delinquency levels of commercial loans since the pandemic began, it is no secret that it is making it increasingly difficult to comply with the financial obligations.

"This pandemic is a tsunami for personal finances, " Bárbara Mainer, an academic at the Universidad Topcoat Di Tell, a consultant and economist expert in finance and financial education, tells BBC Mondo.

"Very few families are prepared to be without income." Therefore, he adds, governments had to implement unprecedented fiscal stimulus plans.

The problem is that the support measures have made it possible to cushion the initial shock, but underground the debts of individuals and companies continue to accumulate.

"This is a very sensitive issue"

As the economy tuition takes a nosedive, people have to keep paying their rent, mortgage, grocery store, basic services, as well as other commitments like health care and higher education.

If in pre-pandemic times it was always quite common for a family member or friend to borrow money from you in the face of adverse circumstances, in these times of coronavirus, it is much more likely to happen to you.

And it's hard to say no if you find yourself in a better situation than the one asking for financial help.

"We don't have the data, but I estimate that loan applications to those closest to us have increased," Mainer says.

"This is a very delicate issue," he says because the delinquency of personal loans with financial institutions is quite high.

In Uruguay, for example, it exceeds 20%. In other parts of the world there are some indicators to estimate the delinquency in these credits between friends.

In the United States, for example, 3 5 % of those who have lent to an acquaintance say they lost money, according to a survey conducted by the financial advisory company Bank rate in 2019.

So how do you lend money to that relative or friend without risking a fight, given that the probability of default is quite high in this context of economic uncertainty?

These are four tips that can help you reduce the chances of a conflict and, ultimately, keep the relationship on good terms, according to Uruguayan economist Bárbara Mainer.

1. What is money for

The first step is to ask what you need the money for. If it is a medical emergency or extreme situation, there is more justification for giving you the funds.

However, it is not uncommon for some people to ask for money for expenses that are not essential, such as changing the car, for example.

Then there is the case of people who simply do not want to lower their spending level so as not to affect their status. In this context, it is easier to just say no.

And the last thing is to pay attention to the issue of addictions. There are compulsive shoppers, addicted to gambling or certain substances, who are constantly in crisis situations and who turn again and again to friends to get out of trouble.

2. Borrow an amount that you are willing to lose

If it is a small amount, the chances of it affecting the relationship in case of non-payment are low. And in the last case, you can take it as a kind of gift to a person at a bad time in his life.

But if it is a considerable amount (in relation to your level of income), then it is something more complex. The point here is to ask yourself the question, what if you can't give it back to me?

3. Put the agreement in writing

This is the most practical advice. Agreements word- of all kinds - are often a source of conflict s by the complexity of human relationships and the way we communicate.

How many times have you been in a situation where the other person understood something and you understood something else and both of you are sure to be right?

Even worse when we are talking about money. So the key is to put the agreement in writing on plain paper and have everyone keep a copy.

That way, you avoid confusing interpretations or misunderstandings. What is written on the paper, are the terms of the agreement?

Now, we are talking about a simple paper, not a legal the document, although you can also find out how that commitment could be formalized according to local laws.

Still, there are countries where a simple piece of paper can serve as evidence in court, but when it comes to loans to friends or family, things rarely end up in court.

"Making a lawsuit to get a little money back is totally uneconomical, " Mainer says.

This is because the judicialization of the conflict is usually extremely expensive and you can end up losing an important part of what you are trying to recover.

4. Make a payment plan

Mainer says it is important to agree on how to pay and set deadlines.

You can also lend a part of the requested money and, if the person shows that he has the ability to meet his financial commitment, then lend him the rest of the amount.

Then the written agreement should include the amount, the terms and some type of interest applied to the amount, in case they have reached that conclusion.

If the payment period is short, such as a few months, then it is likely that no interest will be required, if it is to help a friend.

But if the amount is large and the repayment may take more than a year, then that topic could also be part of the agreement.

Despite all the precautions you can take when borrowing money, it is still a swampy ground that has a double risk: losing your funds and losing a friend.

However, some of these recommendations can help you mitigate the impact.

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