Press Release

When and When NOT to Loan a Friend Money

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So, a friend or family member shows up, hat in hand, asking for cash. If you have some, your first inclination may be to help out. After all, most people wouldn’t ask unless they truly needed it.

Still, the situation can be fraught. If the person can’t repay you as agreed – if at all – your relationship could suffer. In fact, according to a recent Bankrate survey, almost half of respondents who’d lent money to family or friends reported an unfavorable outcome. Further, 37 percent reported losing money, and 21 percent said their relationship with the borrower was damaged.

Perhaps the borrowers should’ve instead taken out an auto equity loan. In any case, there are times when only a loan will do, and times when you simply should keep your wallet shut. Let’s discuss.

Make it a Financial Decision

If someone you’re fairly close to comes to you for money, you instinctively may want to make things right. They’re in a bind and that can kind really tug at your heart. It can also make you do something you wouldn’t usually do, which can compound hurt feelings if you end up stiffed.

Rather than lending cash on good faith, financial professionals recommend putting the agreement in writing, including repayment date. While your friend or family member may be in quite the emotional state, it’s your job to keep a cool head and take a clear-eyed view of the situation. In other words, make a financial decision – not an emotional one.

Further, putting terms in writing eliminates any notion that the loan was a gift, and instead makes it a business transaction. Still, if you don’t feel right lending the money, don’t do it. In fact, if you can afford to give the money, rather than lend it, that might be best for the friendship. If you do decide to fork over cash, make sure it’s not more than an amount you can lose.

Rules to Follow When Lending to Friends of Family

So that your finances and relationships remain sound, here are some rules to follow when lending to a family member or friend.

1. Determine whether you can afford to lend. As much as you might want to rescue someone, you also don’t want to hurt your own financial situation. You could end up kicking yourself if, after making the loan, you must make some sacrifices to stay atop your finances. Then again, if you have sufficient savings and little to no debt, you might want to go ahead and help out.

2. Consider charging interest. Charging interest underscores the fact that the money is a loan, not a gift. It also might dissuade the borrower from considering you their personal ATM. A fixed rate of interest and perhaps a bit of collateral might make the borrower take things less casually.

3. Put it in writing. We’ve already broached this, but you really should have a written loan agreement. That might make things a bit awkward, but you can just explain that you want to avoid any confusion or misunderstanding about terms. Also, you don’t want it to come to this, but the document can be used in court if need be.

4. Don’t feel pressured. You shouldn’t feel obligated to lend money. If you don’t feel like doing it – don’t. And if you know the person has poor credit, or no steady income, or both, there’s a very good chance that won’t be repaid, at least not according to the agreement. So, trust your instincts.

So, there are do’s and don’ts when it comes to lending. In the main, though, do not hurt your own finances, and assess each situation as they arise. If you have the money to spare, consider lending it, but only as much as you can afford to lose.

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