“Neither a borrower nor a lender be.”
Polonius in Shakespeare’s Hamlet knew that lending money to a friend or family member often results in the loss of both the money and the relationship. But when someone you love is in a serious bind and you have the means to help it can be impossible to say no.
So what do you do when someone asks if they can borrow some money? Take the time to consider your answer.
Deal with cash only
Don’t apply for a credit card in your name for someone else to use. Consider carefully if you are asked to co-sign a loan.
Never put yourself in a position where someone else’s actions could affect your ability to secure credit in the future.
Prepare for the worst. Only lend what you can afford. Are you willing to forgive the debt if it’s not repaid? Can you afford to give the amount as a gift?
Get full details
Find out what the money is for. Is it an emergency, or the result of poor spending decisions? If the friend or family member becomes offended by your questions, take that as a red flag.
Related: Why Do We Save?
How well do you know the person? Is it someone you’ve known for a long time, or a new friend or relationship? Are they responsible and trustworthy, or a moocher?
Does the person have the means to reimburse you? Try to evaluate their money situation. What other avenues have been sought?
Talking about money with loved ones can be awkward but you need to be clear about your expectations.
Discuss the repayment plan while everyone is friendly and anxious to make this work. Don’t leave the loan open-ended.
A small loan could be repaid in full by next payday or if a lump sum is expected shortly. A larger sum may need regular payments to be made.
Get it in writing
A verbal agreement might be considered legally binding, but it still comes down to your word against someone else’s – even someone you trust.
It’s difficult to ask for money back when you don’t want the borrower to feel awkward but you don’t want to worry about when you’ll be repaid, either.
For large loans, a promissory note outlines a reasonable repayment plan.
Many websites (like this one) offer free promissory note forms that you can print out and fill in the blanks.
Will you charge interest?
What will happen in the case of late payments, – or no payback at all?
What about collateral? Something of the perceived value of the loan amount could be held until the loan is repaid. If you decide to add your name to the registration of a vehicle or house it would be a wise move to set it up with a lawyer.
Deal with problems with late payments right away if necessary, but once you’ve agreed to lend the money it’s no longer in your control. Don’t obsess about how it is spent.
You don’t have the right to inspect chequebooks or make lifestyle judgments (“You’d have money if you quit smoking!”) or try to manipulate the person.
Consider the impact
Lending to one family member or friend and not another could impact relationships and cause conflict, especially if they see favoritism or enabling behavior.
Make sure your spouse is on board with the decision or it could result in considerable stress if you are lending family money.
Consider what will happen if you die before the loan is paid back. Will the loan be forgiven? Still owed to the estate? Or subtracted from the beneficiary’s share of the inheritance?
Just say no.
If you’re not comfortable with lending money to friends and family, it may be in your best interests to decline the request.
Don’t feel guilty or pressured or beat around the bush. Don’t keep the asker hanging – respond in a timely manner.
“I’d love to help but I’m not in a position to lend you money right now.”
Perhaps you can help in some other way, or find other options. Trust your instincts.
Sometimes relationships trump traditional money sense. Make sure you’re being smart about it. Being too trusting or forgiving may be admirable but it can also lead to being taken advantage of, even by someone who has the best intentions.
Don’t become the go-to lender in your circle of family and friends. Once you’ve lent money that person may ask again or others may also ask for loans.
Don’t dip into your retirement plan or plunder your emergency savings. What if you might need the money in the future? No one knows what tomorrow holds.
If payments are irregular, then sporadic, then occasional, expect that the nature of your relationship will change – it will never revert back to normal.
Money can drive apart friendships and family relationships.
Try to make lending money a positive experience for the people involved.
Have you ever lent money to a friend or family member? Or, were you a borrower?
How did that work out for you?