Why Not To Make A Loan
We have a lot of emotion wrapped up in our money. After all, you work long and hard to get it and parting with it can be difficult, especially if it not benefitting you in any way.
There are a lot of reasons that you should avoid loans between friends and family. Let’s look at a few of them.
You Might Need The Money
Perhaps you have the money to lend but it is part of your emergency savings fund. What happens if you need money?
It might be very hard or impossible to get the money back to handle your own problems. If you can not afford to lose the money, you should never loan it. Why should you make your financial picture tougher because someone else failed to plan for an emergency?
It may seem cold, but you have to take care of yourself and your family first.
The Person Is Bad With Money
If someone is asking you for money, they probably have no other source. This means that they are likely very bad with money.
Look at it this way. Every creditor that they have contacted for a cash loan has said no. This means that they have looked at this persons credit and determined that they did not have the means to pay back a loan. That or they have determined that the person has a track record of defaulting on debt. So, even with all of the means of collecting money that they have, they have determined that a loan is a bad risk for them.
What makes you think that they will be any different with you. Loaning money, in this case, would probably be the same as throwing it away.
You Are Setting A Precedent
Loan a family member or friend money once and you set yourself up for more easy loans in the future. They will look to you every time that they hit some kind of a financial hurdle and they will never learn to take care of themselves. Why should they, they have you.
Even worse, the word will probably get around that you are a bank and you are open for business. Before you know it, you could get the reputation as the “go to” person when you need money. Sound hard to believe, it’s not, in fact, it is very likely.
The Loan Is Too Informal
Chances are that if you loan money to friends or family, it will be the most informal of loans. This is a recipe for disaster. With no clear cut path to repayment, feelings are bound to get hurt. Your idea of paying the money back in a reasonable time might be far different from the idea that your friend has.
Flash forward one month and your friend or family has not paid you a dime. They think everything is okay but you are fuming. It is a great way to burn a relationship.
Getting Out Of A Loan
Refusing to loan money in some ways is just as hard as making the loan. You might be afraid that you will come off as stingy or even uncaring. There are some ways to get out of making a loan though. Ways that will hopefully help you save your relationship.
Never Disclose Your Finances
Maybe you make a lot of money and maybe you have a lot of it saved. This is information that you should never share.
If people know that you have money, they will look to you when they are in financial trouble. It is best to not be thought of as the rich relative. The only people that should know your finances are your spouse and your accountant.
Have An Excuse Ready
You should have an excuse ready BEFORE someone asks you for help with money. Something that you can roll of without thinking. If you stumble, they will know you are lying and could end up with hurt feelings. Here are some great go to excuses.
- Sorry, I just made a huge payment and am pretty strapped now.
- I would have to run that by my spouse first.
- I’ve lost friends to money before, sorry I just can’t loan you money.
- I wish I could but I have a huge IRS payment coming up.
Don’t Set A Precedent
If you do not want to lend money, never loan money. As soon as you make one loan to a friend or family member, you set a precedent. You could get the reputation as being the friend with money to spare.
If You Must Make A Loan
If you absolutely must give out a loan, there are some things that you should do.
First and foremost, get everything in writing. It may sound cold but you need a written contract. It does not have to be anything too formal, it’s just a reminder to both partied about what is expected. Write out the amount borrowed, the amount to be paid back and when it is due. Both of you should sign the paper and get copies.
If they borrow 1000 dollars, for example, the paper should state that they are borrowing $1000 and will make payments of $100 a month for ten months until the loan is paid in full. If you want to be thorough, you could even download a loan template.
When payments are made, they should be documented. Do not accept a cash payment unless it is for the entire amount due. You do not want someone to be able to say that they paid you back part of the money in cash when they did not actually do so. Memories can get fuzzy so a paper trail of payments is the best thing that you can have.
In addition, always keep sight of the big picture. It is just money and friends and family are (usually) worth more. Don’t let a few hundred dollars ruin a relationship that you probably value much more than that.