Saturday, March 29, 2008

Loaning Money to Family and Friends

Most of us have been approached at some time by either a family member or a friend that wants / needs to borrow money for one reason or another. I am going to teach you how to handle these situations. Repeat after me..."NO! "

It's that simple really, just say "no". It may cause you an argument now but at least you will still have your cash. To say yes will only postpone the argument (and it will come when you don't get repaid) and then you will lose not only a friend but your cash as well. If you must say yes, be sure to get something in writing that details when you will get repaid, interest charged, and any late fees that may accrue due to a late payment. I know many people will say charging interest on a loan to family or friends is just evil but hear me out, at what time did you become a bank? Loans come from banks and if I am going to be treated as a bank, I am going to charge interest on a loan just as every bank in America would.

Let's think about the situation further, You as the lender are being asked to loan your hard earned money to someone without a credit check or any collateral. These are things all banks would require to even consider giving a loan. If you were not to loan this money, you could conceivably keep it in an interest earning account, thus by loaning the money and not charging interest, you actually lose it's potential to grow larger.

As you start to accumulate savings, your family and friends with less than perfect spending habits, will start to view you as a bank. DO NOT let their habits become your problems.


Anonymous said...

It's so hard to say no to your friends and family. Since I'm close to them I always want to help them out, but unless I know they are very reliable (which 1 or 2 are), I may never see that money again.

CDeering said...

I know this may sound radical, but if a friend or family member asked me to loan them money, I would say, "No, I will not loan you the money. I will give it to you." I would simply give them the money without any expectation of getting it back. I would make it clear, the money is a gift. No strings attached. My experience with this arrangement is that it keeps everything very clear. Someone is in need. I give them the money they need. What usually happens is they are so grateful for my bailing them out of whatever jam they are in, they pay me back tenfold... either in money or in time helping out with errands, painting a room in my house, or taking on a task. Simple. And no guilt or angst on either side

Dwayne said...

I can understand what you are saying and can agree with you to a certain extent. I have friends and family members that I will not loan money to. They are the ones that I know have serious problems or are a drug head. On the other hand, if someone needs something from me all they have to do is ask. And sometimes they do not even have to do that. Two years ago I had money in the bank, owned my own home and had a pocket full of money. Things happened and 6 months later I was living out of my truck without a place to stay. Although I was not in that situation for long, neither was I in that situation own my behalf, that is the way it was. And if had not been for friends that was willing to help me out I might would still be there.
I would never loan money to someone that is hungry. If I cannot be a man and help out a hungry person without asking them to give it back to me, then I am not a man. That is just the way things are.
So never say never to helping someone in need.

MsCarla said...

Money is something that comes and goes each day we get more and we make more. It all boils down to this, what is important to you? For me, it is my family and friends because each is one of a kind and if I lose them I will never get another. Money is always around (maybe not as plentiful as I would like) it is not as important as people. Where is the love? Money is for the people and things you love if you can not help other then what does that say about you. My heart is so big it forgives the way God does money is from man and when man what to change the value they do the value of love will never change.

Entrepreneur Life said...

I was not saying to say "no" just for meanness sake, nor am I saying do not feed a hungry person, I am referring to the people we all know that can't seem to get their lives together no matter how much we try to help them.

Why do most lottery winners end up broke? Poor spending habits.

Beanieville said...

Glittering generalities don't work.

The people who don't help family in need are (1) those that resent their own family because they were never helped, (2) cheap arse tight wads just using excuses not to help, (3) they don't generally like the person who is asking for help, or (4) greedy S.O.B. who won't help unless they get back something much bigger (as in kicking a sibling out of an inheritance, by helping but only if he gets countrol of the parents' assets.)

Entrepreneur Life said...

Beanieville, Just which of those categories you listed do you suppose I fall into? This post has more to do with the constant borrowers that are not in need of anything more than a good ass kicking for how they choose to blow their money on useless items and then ask you to help them finance the life they want to lead. There is a difference however in being in need and being a moron, a person in need has fallen on hard times by no fault of their own, a moron falls on hard times through reckless habits( for example, alcohol, drugs, keeping up with the Joneses).Can you sort of see the difference? By your definition, If I fail to loan my crackhead family member money for rent after he has spent his on drugs, I'm a bad guy. Rethink life man, you failed.

Marc said...

Most of the time if Iknow the need is real, I will go ahead and just give them the money, not loan it. On those rare occasions that a loan is in order, however, I have a two stage process that I go through.

Stage one: I ask myself can I afford to lose this money? Will it be a problem if I don't get it back? Assuming that I can afford to "lose" $10, we go to Stage two:

If the person comes back later, asking for more, without having paid back the original amount, then I say "NO". No exceptions, no promises allowed. If they did pay it back in a timely manner, then I will go back to Stage one, and it starts all over again.

There are only two people in my circle who have ever been blessed with a yes at stage two, and now most people know not to ask, because they know that they cannot or will not pay it back.

Keeps my life simple, without being too much of a jerk to my friends and family.

JWP said...

I have to agree with cdeering and give it without expectation of getting it back or simply give it and say explicitly that it's a gift.

My wife and I have given money and never gotten it back. Fortunately, we were able to absorb the loss.

The bottom line, if you aren't able to say to yourself -- "You know, it's not going to affect me one way or another if this person doesn't pay me back" -- then DO NOT give it.

Seems pretty straight forward to me. Though, I guess this type of loan can be sticky which explains some of the response you've gotten.

The Commentator said...

I agree and understand what you're saying. It's a tough thing but it's ok to say no. Better to be honest and up front about it if you can't do it.