I’m willing to bet that most of you have either loaned money to friends and family, or have been asked to do so. How did the experience pan out for you? Were you able to maintain a sound relationship with that person, or did it suffer because of the money?
Over the years, I have developed a sound strategy to deal with this issue of lending money and would like to share it with you today.
Should you lend money?
The answer to this question is rarely simple. A lot of times the person in need is a loved one, or is perhaps connected to a loved one in some respect (e.g., an in-law). Regardless of who is in need you should always handle the situation with a good deal of tender wisdom.
Gather background information
If you are being asked to lend money, do not feel guilty about asking all the right questions! After all… It’s your money, you worked very hard to save it, and the last thing you want to do is hand it over to an irresponsible steward.
What is the character of the person in need? Have they been irresponsible with their money, or are they truly in need thanks to unavoidable circumstances? Do they have a solid track record of repaying their debts, or are they likely to leave you hanging out to dry?
Consider asking for an up-to-date credit report to help you make a properly informed decision… Banks and businesses do it, why shouldn’t you?
Consult your significant other
If you are married, or in some sort of committed relationship, be sure discuss the situation with your partner – spouses are typically able to raise points you may have otherwise missed because they approach things from their own unique perspective. Not only that, but spouses deserve equal say in the decision since such financial matters will affect them as much as it does you.
Decisions made together means consequences are dealt with together… An equal share of responsibility will helps avoid the blame game and makes for a happy home!
Can you afford to give the money away?
One way to approach lending money is to avoid it altogether unless you can afford to give the money away. The fact that you can afford to give the money away does not need to be disclosed to the borrower, but being able to do so puts the lender on solid ground, even if the money is never fully repaid.
Unless a trustworthy loved one has a dire need with which you desperately wish to help, if you cannot afford to give the money you may be best advised to avoid lending at all.
Can you give the money without holding a grudge?
You may be able to afford giving the money, but are you “okay” with giving away the money? If you hand over your money, you should probably do so with no expectation of seeing the money again. As previously mentioned, informing the recipient that you do not expect to see the money again need not be disclosed, but having this mindset is essential if you wish to maintain a relationship with the borrower.
As far as you are concerned, the money is gone, but to them it is a debt that they fully intend to repay. If they cannot repay the loan, you hold no grudge. If they do repay the loan, you have money extra money you had already accounted as spent. Both parties win.
Honorable borrowers will commonly offer to repay the debt with interest. Deciding whether or not to charge them interest is entirely up to you and should be decided on a case by case basis. Even if you can afford to give the money away, have already discussed it with your spouse, and are okay with never being repaid because you see it as a gift… you can still charge interest.
If you chose not disclose the fact that you are fine with never being repaid, then the recipient will see the gift as an interest bearing loan, just as they would have secured from a financial institution. If they cannot repay the loan you hold no grudge. If they do repay the loan then your gift has now turned itself into an investment with more meaning than your average high yield savings account.
Do I lend money?
Personally I never loan money, I only give it away. And I only give it away if my wife is on-board, we can afford to do so, and both of us agree that the money is truly a gift… With no expectation of repayment. Lending money in this regard has always worked well for us, has allowed us to help loved ones, and has saved several relationships to date.
What about you?
Do you have any stories about lending money… Good or bad? Let’s hear about them.