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Fifteen years ago, I learned a hard lesson about lending and borrowing money. A relative of mine was in financial difficulty and asked me for a $10,000 loan. You may be familiar with the situation. The family suffered a difficult situation mainly due to their own actions. Layoff from work. An economically damaging relationship. I overspent on luxuries and trips I couldn’t afford.
So why would you ask me for a loan? Or even better, why not me? They knew my family was financially successful. They knew we had just bought a big house. No one takes your money as seriously as their own.
I’ll never forget what he asked me. “He needs a small loan of $10,000 to get through this patch. I promise to pay it back in the next few months.” In one of the biggest mistakes of my life, I gave him 1 I said yes to a $10,000 loan.
Almost 60% of parents still give their adult children money, even though the majority of them live at home: study
There is no thank you note. No thank you email either. There was no follow up after my money was deposited into his bank account. A few months later, things got even weirder. No follow up. There is no repayment plan. There is no communication at all. At Thanksgiving in our family, loans were never mentioned.
Shakespeare wrote, “I am neither a borrower nor a lender.” That would be a good guide, or at least listen to Nancy Reagan. (St. Petersburg)
All I kept thinking was, “When is he going to know where we are and when is he going to give us our money back?” After Thanksgiving…it’s just crickets. From then on our relationship became increasingly strained, he never recovered financially and I never recovered emotionally. That’s why we don’t talk anymore.
Here are some rules to follow when taking out loans with friends and family.
Rule 1
Adopt Nancy Reagan’s ’80s slogan, “Just Say No!” It’s best to tell people you don’t have it. You can’t afford it or you just don’t want to risk your relationship with them. These answers will solve her 90% of the problems that arise when lending money to a person.
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Rule 2
It feels better to just call it a “gift.” If it’s a gift, you’re essentially giving someone money with no strings attached, so there isn’t quite the same level of pressure. So you might be able to help a friend going through a difficult time or a family struggling to pay for their child’s college tuition. You might feel better.
Rule 3
Please make it official. The problem arises when lending is done informally. This means you may not be clear about the terms of your loan (i.e. interest rate, repayment terms). Now, imagine this scenario. You lend money to friends and family (much like the “Everybody Loves Raymond” episode) and they book his four-day trip to Las Vegas on their own.
And every time you see them at any event, you always wonder in the back of your mind… “When will I get my money back?” We need to have a legal contract in place regarding the promissory note, so we have the documentation ready. I’ll leave it to you.
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Rule 4
I’m at work now. Be prepared for your relationship to deteriorate if you fail to pay. How would you deal with future relationships if the loan fell behind and your friend was unable to pay it back? Almost 50% of adults who lent money to a friend or family member experienced negative consequences, and 37% lost the money. 21% said their relationship with the borrower had deteriorated.
Adopt Nancy Reagan’s ’80s slogan, “Just Say No!” It’s best to tell people you don’t have it. You can’t afford it or you just don’t want to risk your relationship with them. These answers will solve her 90% of the problems that arise when lending money to a person.
Rule 5:
There is no co-signing of the loan. period. When you co-sign a loan, you’re not just lending your credit reputation to help someone else. This is an actual financial promise, a promise to pay back the loan if you are unable to do so. This includes late fees and collection costs, which can wreak havoc on your credit score.
If you keep hearing the line “Don’t worry, I’ll pay you back right away!” from the person you lent money to. You may be torn between canceling your loan and canceling your friendship.
Click here to read more about Ted Jenkin
