By Melodie Veldhuizen
Sometimes you are put in an awkward position by a good friend, a family member, or even your adult child who wants to borrow money from you. You would like to help, especially if you are concerned about the person’s welfare. Even if you can afford it, you have to however reflect before you decide, as there is a risk that you could lose your money, or that the relationship will founder, or perhaps both.
How do you decide?
There are several factors that will determine whether you should grant a loan. Consider the impact it might have on your relationship. If you can afford it and the amount is not too big, think about rather donating the money. This will prevent unpleasantness arising later between people you love due to unpaid debt.
When to refuse a loan and how to do it
- If the person has a history of poor financial management by for example wasting money on non-essential items or buying on account.
- If your assistance offers only a short-term solution to a bigger financial problem and will prevent him from helping himself. By lending money, you give him an easy way out of his immediate financial mess instead of him finding a long-term solution. Rather offer assistance of another kind, such as helping him to draw up a budget or recommending that he go for debt counselling.
- If he cannot or does not want to commit himself to a written settlement agreement (when and how repayment will take place and agreeing to you adding interest).
- If he does not want to say what he needs the money for.
- If you think that you might one day be sorry as it might possibly harm the friendship or family relationship, especially if he later confesses that he cannot repay you or conveniently forgets about the loan.
- If you or your family need the money yourself or a possibility exists that in future you will need the money for bigger expenses such as your children’s studies or because you might be laid off at work.
- If it causes discord between you and your marriage partner, especially if he/she feels you want to lend out money at the expense of your family.
- It’s easier to say ‘no’ once than to get involved in numerous quarrels due to non-payment.
- You need not provide reasons or dredge up excuses if you decide not to lend the money. Merely say: “I don’t have the money right now to help you” or “Because of personal reasons I cannot help you”. It’s difficult if he is aware that a big policy has recently been paid out to you or that you have just received an inheritance, but you have the right to decide yourself what you will do with your money.
- Never get personal. It’s inappropriate and unnecessary to blame or criticise him for poor financial management or to question his plans (what he needs the money for). Be sensitive and polite, especially as it probably is a great embarrassment to stand before you and beg.
When to grant a loan and how to do it
- If the person has a positive record of loans and the repayment thereof and you know that he does not handle his finances irresponsibly.
- If he is willing to say for what he needs the money. Is it an emergency and does it have merit? This is very subjective and may differ from person to person.
- Without being judgemental or critical, try to determine why he has landed in such a financial predicament. Give him (especially if it is your adult child) guidelines for a good financial mind-set – try to live debt-free by not using your credit card to (sometimes) buy non-essential items at a high interest rate and to work according to a budget. This could prevent future loans.
- Lend only as much as you can afford without landing yourself in debt or placing your own family in a precarious financial position.
- Draw up a (realistic and viable) settlement agreement for both parties to sign. Give a deadline and say if you want the money returned in one big amount or in instalments. At what interest rate are you lending out the money?
- After having said ‘yes’, you should not allow the loan to spoil good family or friendship relationships. You made a decision and until and up to the settlement agreement comes into force, accept that you made a good decision until the borrower proves you wrong (or not).
- Don’t allow this agreement to let one of you feel uncomfortable or for it to place the borrower under pressure for the rest of his life (or until the debt has been repaid) to mind his steps.
- It probably was a great embarrassment for him to ask to borrow money, therefore treat it as confidential.
Her Money. httpcs://www.hermoney.com/connect/family/when-family-and-friends-ask-to-borrow-money/
Money Crashers. https://www.moneycrashers.com/why-you-should-not-lend-money-to-friends-and-family/