You can probably count the number of truly good friends that you have on one hand and even then you’ll probably be only using two or three fingers.
When I say friend, I’m talking about those that can pick you up when you are feeling down, those you can pick up the phone too and spend minutes or hours talking about something or nothing and those that you can truly be yourself around without feeling that you are constantly being judged.
So with friends hard to come by why would you put money into the mix?
When enough just isn’t enough
I’ve read and seen stories where people have talked about what they would do if they were ever to win the lottery, only for their numbers to come up.
One of those promises that people make is to make sure that friends and family are set for life, usually involving paying off their mortgage or giving them a life changing lump sum, for them to go back cap in hand wanting more when it is all gone
I’m a big fan of courtroom television and find it incredible that so-called friendships can be ruined by what can be considered minuscule amounts.
What is interesting is that those that have been lent money don’t see anything wrong in continuing to spend as if they didn’t have a care in the world. The fact that their friend or family member might now need this money back isn’t even given a second thought.
4 Reasons why I don’t believe you shouldn’t lend money to friends or family
You’re going to be in the wrong
When giving money you have to make sure that you actually make it clear that this is a loan with the expectation that you will be wanting it back at some point.
And guess what happens when you do ask for it back, you’ll hear 1,001 excuses why the other party can’t or won’t pay it back.
It becomes the expected
When you lend money to friends and family, no matter what the amount it becomes the norm. This is made worse when the asking party knows that you’re actually good with money and have been able to save yourself an emergency fund or have come into money from another source.
You will quickly become considered the “bank of” and it is likely that you will be asked for more money than you are prepared to lend, and unfortunately saying no is often the hardest thing to do.
Your situation might change
It’s all very well lending money in the good times, but no one ever really knows what is just around the corner. Are you going to be able to bite the bullet and actually ask for it back when you need it.
Relationships will be ruined
The three reasons above, lead to one conclusion.
No matter how strong you think your relationship is lending money is a surefire way of ensuring that you ruin your relationship.
There is going to be situations where you don’t agree with the reasons about what the money is being spent on, or you are going to find out that the spending habits of the borrower haven’t changed for the better.
What you need to do if you are still going to lend to friends and family
Get it in writing!
You might think that you’re lending money purely out of love and affection for the borrower, but this is a proper financial transaction, where both parties have to know the expectation of repayment.
Therefore getting a loan agreement in place ensures that all parties understand their rights and obligations.
What needs to be in a loan agreement?
There are plenty of templates available on the internet, but you can quite easily draft you own.
So make sure that it has the following:
- The date the loan is being made
- The amount that is being lent
- The date the loan is expected to be repaid how it will be repaid (monthly, in full)
- Whether there is going to be interest added and how much
- Consequences of the loan not being repaid by the expected repayment date (small claims)
If it isn’t signed it’s not worth the paper it’s written on so make sure that all parties have read and understood the terms of the agreement and even better have a third party sign the agreement as a witness.
Think of the alternatives
If you find yourself being constantly asked to lend money you might actually be doing more harm than good in lending the money without question.
You have obviously been asked because you’re good with money so why not try and pass your knowledge about personal finance on. If the borrower has no interest in being taught skills that will help them in the future, you have to wonder whether they are certainly someone that you should consider lending money too.
As the saying goes, give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime