Nine rules of lending money to friends and family
Lending money to friends or family can often prove to be one of life’s greatest dilemmas. There’s the uncertainty that familiarity would get in the way of you being paid back, as well as the awkwardness that comes with an extended time for repayment.
On one hand, you really want to help somebody you care for when they’re in a financial bind, but on the other hand you know it probably won’t go off without an issue. Ultimately, the decision is yours on whether to extend that helping hand. If you choose the good Samaritan route, it’s important to remember these nine do’s and don’ts.
1. Carefully consider who you’re helping. If it’s your brother or sister who’s in need of a quick loan, and you know they’ll pay you back on time, your decision to lend them money is a no-brainer. But if it’s a 2nd or 3rd cousin who has never shown financial stability since you’ve known them but somehow always has money to attend a concert or get a nice hairstyle because they must be on point, you should probably sleep on it. If you still feel the urge to help that relative out despite knowing there’s a high chance you won’t be repaid, consider it a “give” rather than a “loan”. It’ll save you the headache.
2. Don’t be afraid to say no. You’re under no obligation to give anyone a dime of your hard- earned money, aside from the government or your own creditors. If you don’t feel comfortable lending money to a friend or family member, just say no. They’ll get over it. If they don’t, you’ll be fine.
3. Only lend an amount you can afford. This is the most important point, in my opinion. If you have the disposable income to offer a loan without feeling the pinch, then it is okay. Only lend what you can afford without compromising your own financial situation. Don’t over extend yourself.
4. Keep it strictly business. Lending money is a business deal, not a friendly transaction. And when you treat it like a business deal the experience is likelier to go much smoother than when it’s positioned as a friendly transaction. If it is an amount over $500.00 you can draw up a written contract, establish repayment terms and have both parties sign. Each of you should keep a copy, and post it on the refrigerator as a reminder.
5. Never belittle the borrower. If you’ve decided to help by giving someone a loan be sure to keep your opinion about their personal finances. There’s no reason to kick somebody while they’re down just to make yourself feel better. You can offer productive solutions to their consistent finance problems, but never in a way that makes them feel bad about themselves. This loan is between you and them, not between you and the whole world. You don’t have to tell anyone about it. Likewise, you shouldn’t hold it over the borrower’s head. If a payment is missed, address it appropriately and in a private setting.
6. Avoid giving into emotional bullying. People who need money will sometimes pull out all the stops when trying to convince you to subsidize their life. Stay strong! Don’t let those sad excuses and crocodile tears drag you down, especially when the dramatics are from someone you know better than to trust with a loan. This age-old line is commonly used as a guilt tactic in The Bahamas “you know if it was you, I would’ve given it to you.”
7. Never co-sign for a loan or add them to your credit cards. Lending cash is one thing, but co-signing for loans and adding them as an authorized user on your credit card is a whole other ballgame, and you absolutely don’t want any part of it. It is almost guaranteed to be a disaster. If that discussion is on the table, swiftly shut it down.
8. Don’t dip into your own savings. If you can’t afford to fund a personal loan from your own disposable income, you can’t afford it. Your savings are just that…a savings for your personal use. You only should use funds from your savings for emergencies, a new investment, or whatever you want. That’s money that you’ve worked hard to build up, and you shouldn’t let anyone take away from that.
9. Plan for the worst. Lending money to family and friends doesn’t always go as planned, which is why it’s important to be mentally prepared for anything. My school of thought is to take the position that you won’t get the money back, but if you do get it back in full it’s a win!
A good thing about lending money to family or friends is that you will establish a credit system of your own with them. If you’ve lent them money before and weren’t repaid, they’re fully aware of their bad credit with you and should know better than to come back for a second. Lending money also establishes a good financial relationship whereas you too can benefit in the event you fall on hard times. Either way, lending and borrowing with family and friends is tricky. But those nine tips should go a long way with deciding who and how much.
• Quinton C. Lightbourne is a certified financial planner with the Chartered Institute of Bankers in Scotland and vice president of the Bahamas Investments & Securities Business Association (BISBA). E-mail: quinton_lightbourne@ hotmail.com.