7 Questions to Ask Yourself Before Lending Money to Family or Friends
It’s a simple question.
It’s powerful; it creates tension; it drives a wedge between relationships; and nobody likes to hear it.
What is it?
“Can I borrow some money?”
Yes, that question. The dreaded question nobody wants to answer. Unfortunately, we’ve all been in this situation before. It’s always awkward and it doesn’t usually end well. Money is the cause of many failed relationships between family, friends, or lovers. We all have our own story about lending money to others. While a few people out there may have stories with happy endings, the majority of our money-lending experiences can be classified as ultra horror stories. Mine was certainly one of them.
By the time I graduated college, I was unemployed and owed thousands of dollars in student loans. However, I had a little nest egg tucked away. I was proud of it, because it was tangible proof that I maintained hard work and diligence throughout college.
That bliss didn’t last very long. You know what they say: When you have money, people come a-runnin’. Christmas was right around the corner when I received an email. A couple of family members claimed they were in dire need of money for gas, rent, and other basic necessities. I wasn’t the one to turn away a comrade in their time of need, so I loaned them a couple thousands of dollars.
I soon discovered that they were throwing parties, indulging in weekend getaways, purchasing brand-new snowboards, going on shopping sprees, and enjoying the luxurious life I didn’t get to have… all on my hard-earned dime.
When I realized that I’d been had, I became angry. I needed that money a lot more than they did because I had bills, a hefty student loan debt, and no job. I confronted them and tried to reason with them, but they got defensive and hostile.
That was four years ago, and they haven’t paid me back a cent. Even though I’m two thousand dollars poorer, I learned a valuable lesson: always be smart and evaluate everything carefully before doling out a cent to anyone who hits you up for money.
The best way to make a smart money-lending decision is to ask the following seven questions:
1. Why does this person need money?
Banks don’t loan out money without knowing what it’s being spent on, so why should you? You might be worried about hurting your family member’s or friend’s feelings, but you should never blindly hand over funds just because someone “needs a few dollars”. It’s your money, so you have every right to know what the money is for so you can decide if it’s worthy of a loan.
When hit up for a hefty amount of cash, ask the person for all the details about where the money is going. If he refuses to spare any important information, take that as a huge red flag and don’t give him anything. If he complies and gives you all the information you need, do your homework to ensure that your loan is going to be used wisely.
For example, if a friend asks you for a thousand dollars to help pay off her car loan, find out how much she has to pay each month and whether or not she will be able to pay off the rest of her car loan. The last thing you want is for your friend to put your money towards her car payments, only to have the car repossessed in the end because she couldn’t come up with any more money to pay off the rest of the loan. Your generous loan would be wasted, and there might be a high chance you would never see the money again.
2. Are there other options?
Often times, when asking you for money, a person might try to make you believe that he has depleted all his options before coming to you. Sometimes it may be true; sometimes it may be false. Talk to him and find out if he already tried to get a bank loan, dipped into his IRA, or explored all the other money borrowing options available to him.
You can also find out if there are other ways for you to help. In most cases, money isn’t the only solution. You can offer service-based assistance.
3. Can I afford to lose this kind of money?
With the economy falling apart, more and more people are weaseling out of repaying their loans. If you’re lucky enough to end up with a borrower who’s actually responsible enough to pay back her debt, she’ll be likely to put her money towards interested-based loans by financial institutions before she gives you a dime. It’s because she has a lot to lose by not paying her mortgage or student loans (she’ll be at risk of foreclosure or bad credit, respectively) while the only thing she’ll lose by not paying you back is your friendship.
If you give out a personal loan, you might never see the money again. You have to ask yourself if you can handle losing this much cash. Would you go about your day without realizing that the money’s gone, or would it break you financially?
4. How well do I know this person?
Before lending out a large amount of money, make sure you know the borrower’s background. Is this person a new friend or lover, or is he someone you’ve known for a long time? Is this person is a habitual borrower (or even worse, a moocher) or is he a responsible and trustworthy person?
Do your research. Ask mutual friends or family members if they’ve had experience lending money to this particular person. Ask them whether or not they’d advise you to do the same thing.
5. Does this person have the means to reimburse me?
Evaluate this person’s money situation. Does she have any kind of income? Are you confident that she makes enough money to repay you? Also evaluate the loan itself. If the person only needs $100 to pay for a parking ticket, she’ll probably repay you right away or after a short period of time. However, if she needs $3,000 to catch up on her mortgage payments, she’ll have a much harder time paying you back and will probably end up not reimbursing you the full amount.
6. How will this loan affect my relationship with other people?
Not only will this loan affect you and your borrower, it may also affect other people. Do you have a spouse or a partner who might get upset over the loan? Do you have other friends or family members who might feel that you’re favoring this certain person over them? Take the time to think about how going through with this deal will impact other people around you.
7. Can I distance myself?
The worst part of lending money to someone is feeling the need to constantly monitor that person’s spending habits. I was guilty of this when I lent the money to my two family members. I obsessed over how they spent the money, and I ended up harboring ill feelings towards them. It’s not healthy to question the borrower’s every move and get upset every time he goes on a vacation instead of repaying you.
Ask yourself if you’re able to separate yourself from the money and focus on repayment only. If you can’t distance yourself, you should think twice about lending the money. It’ll bring you nothing but misery.
Also, ask yourself if you can afford to have a strained relationship with this person. If you’re not reimbursed, your relationship with this person could go sour.
Never, ever dole out a big loan out of fear or obligation. Always trust your instincts. If you feel uneasy about going through with the deal, just remember that it’s perfectly okay to say no. It’s your money, after all!
Be honest. Explain why you’re not going to hand over the money. A true friend or a loving family member will understand.
In some cases, being honest may do more harm than good. No one can imagine telling their slacker nephew that there’s no way he can be trusted with a thousand bucks. For these kinds of scenarios, you can simply say one of the following things:
- “I’m sorry, but my policy is that I don’t loan money to anyone.”
- “I’m sorry, but my cousin didn’t repay her loan yet. When she does, I’ll loan it to you.”
Saying yes… and protecting yourself
In the event that you find your borrower responsible and trustworthy enough to take out a big loan from you, always put it in writing. Even the most well-meaning folks can fall in a rut and default on their repayment obligations. In the end, who gets hurt? You. It’s your responsibility to protect yourself.
Draft up a contract. Delineate how much money is borrowed, and how it is to be paid back. Get it notarized. If the loan is large enough, enlist the help of an attorney. Agree on a repayment plan. Treat this loan as a business transaction.