One of the most common questions I get is should you lend money to family or friends? Generally speaking, I’d advise against it, but I understand it’s a complicated situation. You want to help if you can, but at the same time, money can ruin relationships.
I personally have been burned twice lending money to friends. There have also been times where friends have paid me back money borrowed, plus interest. There’s no real way of telling if you’ll be made whole unless there’s a legal contract in place and even then, it may be difficult to enforce.
If you’re wondering if you should lend money to friends or family, consider the following.
Can you afford it?
The first question you need to ask yourself is if you can afford to lend your friends money? The problem is, many people don’t have a real definition of affordability. When I was in high school, my friend asked to borrow $300. I looked at my bank account and saw that I had $600 and thought, yeah, I can lend him that amount. In hindsight, lending someone half your savings is a bad idea. Also, for the record, I never got a cent of that money back.
Now that I’m older, $300 won’t break me, but that’s still not chump change. That money could pay for quite a few things such as almost a month of groceries for my family, a transit pass for two months, soccer lessons for my daughter. I need to prioritize my money and lending it to others may not be high on my list.
Never drain your savings to help friends or family. It might seem like a good idea, but what happens if you run into an emergency when you’re waiting to be paid back? Who will help you?
Will the money actually help?
When friends or family ask to borrow money, you really need to ask yourself if the money will help. A former coworker of mine asked for a $100 loan once to get him by until the next payday. This was a friend so I didn’t mind. Come payday, I was paid back in full. The problem was, every few months he would ask again. Clearly, money was an ongoing problem so I felt that lending money to him wouldn’t help in the long run. I had to cut him off.
The tricky thing is determining if money will actually help since it’s subjective. Sure, a loan to pay off debt would help them. But what if they just end back up in the debt trap? Alternatively, if they say they need the money to start a business, you have the right to ask what their business plan is.
There are many situations where lending money to someone will help them out of a jam. These people may also be worth the gamble. If you’re going to lend them the money, then at least get some kind of written statement with a timeline of repayments that’s signed by them.
What’s your relationship?
So far I’ve mentioned a high school classmate and a coworker. While these people were friends at the time, it’s not like were close. Although I’m not a huge fan of lending money to friends or family, I would put some thought into it if it was a long time friend or family member.
If my best friend came to me and said he needed to borrow money, I’d listen. Of course, the request would still have to meet the above requirements before I part with my cash.
Now if the request is coming from family, I admit that I’d have to seriously consider it. I come from a culture where helping family is a priority. If my brother needed money, I’d probably lend it to him. In the future, if my daughter asks me for a loan, I’d probably just give her the money.
While your relationship shouldn’t play a factor when deciding should you lend money to friends or family, I admit that it can affect your judgement.
Are you willing to part with the money you’re lending?
Here’s the reality. If you’re willing to lend money, you should think of it as a gift. It doesn’t matter what the person says, there’s always a chance where you won’t get the money back.
When I was in college, I lent one of my closest friends $200. $100 was paid back within a few weeks, but I never got the rest of the money. I let the relationship cloud my judgement, but at the time I was ready to accept that I would never get this money back. I had learned my lesson from my high school friend who never paid me back.
Not getting a small amount of money back may not be a big deal for some people, but what if your friends or family are asking for huge amounts of money. Maybe they need it to buy a home or to start a business. You need to be ready to accept the fact that you may never see that money again. Alternatively, you may want to put a formal contract in place where you’re getting some kind of equity.
Keeping money separate from friends or family is always a good idea, but understandably, it’s not always that simple. If you think the person is worthy of a loan, then by all means go ahead. However, to protect yourself, you should have some kind of contract in place which shows the amount borrowed and what the expected payment timeline is. It’s not like this document will hold up in court, but it’ll show that you’re serious about your money and you expect them to be too.