Tips for Lending Money
There’s an old saying, “If you want to get rid of your enemies, just lend them some money, and you’ll never hear from them again.” We’ve all had a situation where a friend or family member is in need, and we’ve all been asked for some help.
The bigger issue is really that Americans do not have enough savings. In fact, 63% of Americans do not have enough savings to cover a $500 emergency. So when the unexpected inevitably happens, we are likely to turn to friends or family. And we’re a generous nation apparently, since more than 90% of young Americans have stated that they would loan money to a family member in need.
So if you do find yourself in that precarious situation and wondering if and when you’ll ever get your money back, here are some things to consider:
Can I Afford It?
If you don’t have enough money to be able to loan the amount being requested and never see it again, then you probably shouldn't do it. Think of it this way, do you imagine that a bank would approve a loan to a customer, if the bank itself didn’t have the capital to bear the loss of that loan? Now, you’re obviously not a bank, but keeping the risk factor as low as possible in this kind of situation is a good idea, not only for your bottom line, but also for the interest of keeping a friendship.
What Do They Need the Money For?
If you can afford to make the loan, you might still wonder why this person needs the money. What are they going to use the funds for? Do they need help with essential expenses, like rent, or are they just looking to purchase a new TV, or take an expensive trip somewhere, or get the latest designer handbag that costs $1000?
It may be in the person’s best interest to sit them down, and explain that if they can’t afford rent, then they probably shouldn’t be spending money on expensive designer clothing. “Teach a man to fish…” as the old saying goes.
Interest?
Charging interest to a friend or family member may seem a little cold and detached, but it might be worth considering. If the loan is structured with payments over time, and you’re concerned that the person will not be able to keep up with the payments, then charging interest might be a worthwhile tactic. Charging interest also gives the borrower the impression that it is a business transaction and may encourage them to take it seriously.
Emotional Interest
Ask yourself this: If this person defaults on the loan, will it ruin a relationship? Are you willing to lose this particular friend? Emotional consequences are inevitable when tense money
situations arise. If you’re willing to forgive and move on, then that’s one thing, but if you think there’s a chance you could lose a friend over lost money, then the answer should be clear to you.
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