Conventional wisdom holds that you should never loan more than you can afford to lose. Believe it. If your brother or your BFF asks for $500 for car repairs, you have no guarantee you’ll ever see those funds again.
How do I know? Because I’m owed money by both a relative and a couple of friends. They aren’t bad people, just casual with cash. I’ve long since written off the relative’s loan, especially since this person has given me a bunch of rides to and from the airport when I visit my dad.
If this situation sounds emotionally loaded, that’s because it is. Here’s what Money Talks News founder Stacy Johnson has to say about the subject. Check it out, then read on for more detail.
As for the other loans: I’m owed a total of about $2,100 but I’m about as likely to get it as I am to wring plasma from limestone. That was a calculated risk, and I have no one to blame but myself.
Fact is, I wouldn’t have made those loans if it kept me from paying my own basic expenses. You, too, need to keep in mind whether you can truly afford to lend money. If it’s going to torpedo your own budget, keep that wallet in your pocket.
Here are the Golden Rules of loaning to friends and family:
Rule one: Make a policy and practice of saying “no”
Have trouble saying “no”? Try it a different way:
- “That’s not in my budget. Sorry.”
- “I have a strict anti-lending rule: I’ve lost too many relationships this way.”
- “I paid for your last car repair and you haven’t returned the money. I can’t do it again. Sorry.”
- “Let me look at my budget and see what’s possible. I’ll let you know by the end of the day tomorrow.” (This is for when you’re blindsided and/or it’s a very emotional situation. Go home and send a “that’s not in my budget, sorry” email.)
And if the would-be borrower continues to plead or badger you? Remind yourself that you cannot wreck your finances to prop up someone else’s. It’s really OK to reply, “I’m not in a position to help you and I won’t discuss it further. Sorry.” Be prepared to hang up the phone or walk out of the room.
Should the person bring it up again the next time you meet, firmly state that “if you keep talking about borrowing money, this conversation will be over.”
The most important thing to do is formulate your own policy now, so you won’t have to think on your feet when the situation arises. Maybe you only lend in dire emergencies, or to relatives with jobs, or to nobody, no matter what. The important thing is to decide on a policy, memorize it, practice saying it and stick to it – no exceptions.
And when confronted, don’t beat around the bush or ask to think it over. Your response should be immediate and firm.
Rule two: Try to help in other ways
Financial guru Dave Ramsey doesn’t think you should ever loan money, especially to family members. “It ruins relationships,” he says. “If you have the money to help then give it, don’t loan it.”
Don’t make a habit of it, though. If your cousin or your frat buddy needs help on a regular basis, those cash infusions address the symptom rather than the disease. Whether it’s careless spending or a lifestyle that’s too big for its britches, the underlying issue needs to be fixed, not enabled.
Offer help instead of a bailout, suggests wealth psychology expert Kathleen Burns Kingsbury. For example, you could decline to chip in on an auto payment or credit-card bill and instead propose help in setting up a budget or paying for a few sessions of therapy for a compulsive shopping problem.
“It may be that you can negotiate something where you’re helping, really helping,” Kingsbury says, “instead of supporting unhealthy behaviors.”
Other non-cash aid might include:
- Making budget information available: Maybe your friend doesn’t want you snooping in his finances, but a site like Power Wallet will help him track expenses, set goals, measure progress and even find coupons – and it does it all privately
- Helping list items on eBay or Craigslist
- Suggesting they investigate peer-to-peer lending
- Assist them in finding a little extra work
- Lending or buying them a personal finance book (I’d suggest anything by Liz Weston, Clark Howard or, of course, our own guru, Stacy Johnson.)
- Signing them up for the Money Talks News newsletter
Rule 3: If you must loan, be smart about it
If you do decide to lend, get it in writing. Seriously. Even if it’s your mom or the parents of your godchild.
You can get a free promissory note form online from Suze Orman. Gail Cunningham of the National Foundation for Credit Counseling suggests getting the documents witnessed and notarized. This shows the borrower that you’re serious about being repaid. It also protects you later on if things get ugly – for example, if that former BFF stands in front of a judge and says, “It’s not my signature.”
Be specific about repayment terms. “As soon as possible” is vague enough to be interpreted as “any time from next week to never.” Spell out what happens if you were to die before the loan is repaid: Will it be forgiven, owed to the estate or (if the borrower is a close relative) be subtracted from that person’s share of any inheritance?
You might also consider putting this phrase into the document: “If you don’t repay me via the terms on which we agreed, you will never again be allowed to ask me for money.” (If this person has the chutzpah to ask for additional bucks a couple of years after stiffing you, turn the agreement into a paper airplane and throw it at him.)
If this is a major amount of money vs. spotting a pal $50 until payday, protect yourself by talking to a lawyer and, possibly, requiring something to secure the loan.
Again, you shouldn’t lend money you aren’t willing to lose. Promissory paperwork notwithstanding, are you really prepared to take a sibling or a friend to court?
P.S. With regard to my own money lending, the bank is now closed to all but the most serious family emergencies.
Do you ever loan money to friends or family? If you’ve got tips on how to keep it real, tell us in the comments below or on our Facebook page.