The economic recovery is sputtering and the talks of double dip recession is at an all-time high. In these tough times, it is common to have friends and family members who are undergoing hardships. Some of them may be coming to you for help. Should you consider lending money to your friends and family? On the flip side of the coin, if you are in trouble, should you reach out to loved ones for financial assistance?
If you are considering lending money:
1. Is it money you can afford to lose?
If this is money you need to start the small business you’ve been planning for years, or money for a down payment you will need in six month, or college tuition for your 17-year-old child – don’t lend it! Because the worse case scenario may happen and you won’t get this money back. Therefore, it’s a good idea to be emotionally and financially ready for nonpayment before you write that personal check.
2. Do you trust the borrower’s financial acumen, fiscal discipline, and integrity?
Notice how the question to ask isn’t “Is the borrower a good person?” or “Does he really need the money?” If you are considering lending money to a friend or relative, the answer to those questions is probably yes. But some very good and kind-hearted people are less-than-great stewards of money. If you want to have a realistic chance of getting your money back, you have to make sure the borrower is able and willing to repay you.
3. Can you make a gift of money instead?
Lending turns normal relationships into bank and borrower – an awkward situation even among the closest of loved ones. If you are uncomfortable with lending money but still want to help your friend or relative, why not give money instead? You will feel good about helping without the headaches of being a lender.
If you are considering borrowing money:
1. Do you have a realistic prospect of repaying this loan in a timely manner?
If not, then don’t borrow the money. Relationships damaged by lack of repayment are difficult to repair – I venture to say that if the amount is large enough, those relationships can never be repaired. For example, John might be on the verge of losing his car and need $5,000 to keep away the repo man. But if he have no prospect of repaying that $5,000, he need to think long and hard before he asks his best friend for the money. It is terrible to lose a car, especially if it’s your only mode of transportation. But it is far worse to lose a true friendship.
2. Can you make sacrifices and forgo much discretionary spending before you have repaid the loan in full?
We have all heard stories of the borrower who is unable to repay $300, but has just come back from a Bahamas vacation. It might not be fair, but it’s human nature: if you borrow money from friends or family, they will probably be aware of what you are spending your money on.
3. Is there some other way friend/family can help?
Asking for money is hard to do. If some other type of assistance is useful, try to ask for help in that regard instead. For example, if you are job-hunting and you have a friend who is an HR officer, ask her to review your resume and put you in touch with a few informational interviews.
Money and family is always a tricky subject. In general, the proverb “neither a borrower nor a lender be” strikes me as a fairly good standard to go by when it comes to mixing finance with family or friends. But, of course, personal finance is never just about money. If my family needed money, I would do what I can to help.
Have you ever lend to or borrowed from your family / friends? How did that experience work out?
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Great points WH! Having being burnt a few times, I tend to agree. Do not lend if you can't afford to lose your loan. You'll most likely lose your friend and possibly your money.