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Blogging for Change Blogging For Change
by Jesse Campbell on September 02, 2015

Five questions you need to ask before lending money to friends and family

“Hey, can you spot me a twenty?”

In the natural course of nearly all friendships and familial relationships, money will change hands. Usually the smaller the amount, the faster the exchange. A dollar for the vending machine may fly from your wallet, while a $400 loan to cover rent won’t come quite so easily.

Lending money to friends and family always carries a number of financial and interpersonal risks. In a best case scenario, you get your money back quickly and nothing changes in your relationship. In a worst case scenario, you lose your money and you lose an important relationship.

When a loved one asks for money, your instinctive desire to help might kick in before the part of your brain that assesses risk gets a word in edgewise. Slow down. If you find yourself in such a situation, take a moment to ask yourself the following five questions:

Can I afford this right now?

Where does this loan fit in your budget? You need to actually have the capacity to make the loan first, because otherwise you’re fixing their problem by creating one of your own.

Even if it’s a relatively small amount and you think you can afford it, look at the numbers. Ask for a little time to look at your finances before agreeing to anything and then decide where this money would be coming from. Would it come out of savings account? Would it come out of another budget item? Make sure you really can help before committing to any loan.

What happens if I never get this money back?

We always hope (and depending on the situation, usually assume) that things will work out just fine. Your friend will pay you back when they said they would and that will be that.

Every personal loan, however, comes with the risk that it will be paid late, that it won’t be paid in full, or that won’t ever be paid back at all. Consider the worst possible outcome and ask yourself what that would look like.

Financially, would you be okay if you were never paid back? Where and how would you suffer for that loss?

Alternately (and possibly more importantly), what would a “default” do to your relationship? Try to be as honest with yourself as possible. How would your personal relationship be impacted if this loan went sour? Try to think even further out – are their other relationships that might suffer, or change significantly, as a result?

You might be able to handle the financial cost of a defaulted personal loan, but what about the emotional costs?

Does it matter how the money is spent?

It’s your money until it isn’t – meaning, once the loan leaves your hands you lose your control of it. Do you care how the money is spent? And more to that point, does it matter why the loan was required in the first place?

These are important questions to consider, because money is a sensitive and emotional topic, especially if you’ve ever struggled to manage your money. Will you be bothered by what happens to your former money? Will you try to influence how that money is spent?

If you’re going to loan money to a friend or family member, you need to be at peace with how that money is used. If that’s not going to happen you need to consider not providing the loan (for everyone’s sake).

What conditions should I place on this loan?

When financial institutions lend money, they set the terms of the loan: when payments are due, how much those payments will be, what kind of interest or fees will be charged, etc. Those conditions aren’t arbitrary – they’re based on an analysis of the borrower.

If you decide to lend money to a friend or family member, you should make sure to set clear, mutually agreed-upon terms to the arrangement. If you lend money and leave it open as to when you’ll be paid back, you’re opening yourself up to a big headache (and possible heartache).

Before you agree to anything, decide what conditions make the most sense for your needs and theirs. When do you need to get the money back? When can you reasonably expect them to be able to repay you? What happens if they can’t pay you by the agreed upon date? Making those decisions ahead of time will make the process infinitely less painful down the road.

What will happen if I don’t lend this money?

Finally, it’s a necessary to ask yourself what will happen if you refuse to make the loan. After all, this is a friend or family member asking – you care about them and you care about their wellbeing, so it’s important to put the loan into perspective. Will they be placed into a dangerous or unhealthy situation if you don’t make the loan? Or will they be just fine?

Loans, of course, are rarely life and death situations, but they can be significant. Does the “borrower” have other options? Is this money for a need or a want?

Take those answers and put them all together to form a complete picture of what this loan really means, what it will accomplish, and what its potential consequences will be. After that the decision is yours. There’s no way to know exactly what will happen after you’ve made your decision, but the more you think about these kinds of questions, the more prepared you’ll be, whatever the outcome.


Samuel Friday says:
November 28, 2016

it's awesome

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