Money is never an easy subject; when you combine it with friends and family it becomes downright painful. One of the most delicate questions is whether you should lend money to friends and family. The answer is complicated.
Should you or shouldn’t you?
The general consensus is that it’s never a good idea to lend money to friends and family. This advice comes from financial experts but it’s backed up by people who have lent money and learnt the hard way why it’s such a bad idea.
When a loved one comes to us to ask for money, we usually feel that we have no choice but to say yes. The most compelling motivation is guilt. We also don’t want to risk disappointing the person, which could have an adverse effect on the relationship. The truth is that, more often than not, saying yes has an even worse effect. It places a burden of expectation on both parties, as well as the uncertainty that those expectations will be met.
The best advice is to ignore the guilt and look at the request objectively.
Can you or can’t you?
Ask yourself, can you afford to part with the money and then do without the money for an extended period of time? If you have the money at hand, but will need it back quickly don’t give the loan. Family and friends are notorious for ‘forgetting’ about loans or putting them on the back burner. Chances are very good that you will be paid back very late; if at all.
You also need to ask why the person is asking for money. Is it to bail them out of debt that they can never shake? Is it to help with payments for which they are always late? Is it for a once-off emergency, like repairing a burst geyser? If the person is a habitual late-payer and cheques always bounce it’s a fair indication that you’ll never see your money. It also shows a complete inability to manage money and you end up being what is called an enabler. You just help them remain in the situation and continue bad habits.
If you decide that you will lend the money you need to treat it as a formal loan. That means you need to set terms in writing, you need to charge interest (it needn’t be high but a token amount will help the borrower to take the loan more seriously). You also need to set a deadline for repayment and, if necessary, a repayment schedule.
If a payment is missed, gently remind the borrower of his or her obligation. You don’t have to be nasty about it, but you need to underline the fact that you expect the money back.
If you can afford it, make the loan a gift, that way neither party has expectations that won’t be met.
However, don’t acquiesce to any more loan requests. You don’t want to be treated as someone’s personal ATM.
The question remains delicate and the answer remains complicated. Perhaps the decision depends on two over-riding questions: how much do you trust the person and how well do you know their spending habits?
This guest post was written by Sandy Cosser on behalf of Direct Axis, which takes the awkwardness out of borrowing money from family and friends by providing instant loans and debt consolidation.