Recent Blog Post : Financial Planning 7: Emergency Fund planning. Click here to view

Don’t lend money to every friend / relative.

Author:

Friendship and money : It’s almost like oil and water..

It’s difficult to watch your friends or relatives struggling financially. If you’re well off and good at heart, you might want to reach out and help them. There’s nothing wrong to lend a helping hand. In fact, we are supposed to help them in whatever way we can. That’s helping – quite different from lending. When you help them with an amount, you don’t expect it back. It could be a small amount. It’s ok if you don’t get it back.

But lending is different. You lend money when your friend or relative officially asks for some money, stating a purpose and with a repayment term loosely said ‘I will return it as soon as possible’.

What happens in such situations is that you will be held up in a dilemma-

It would be difficult to say ‘no’ given the depth of relationship between you guys. It would also be difficult to ask for a written agreement. If you are good in finance, you will also have a calculation of the interest income  that will be lost in the process. Since the repayment terms says ‘as soon as possible’ and not a definite date, practically it could prolong for an indefinite time and you may feel very awkward to remind him about your money. If you don’t help him, you might just lose that relation also. It’s actually a trap. If you have lend money like that, you have only two solutions left –

  • Politely ask back the money indirectly.
  • Write it off!

Lot of people have fallen in such traps and have lost their money. Remember, it is your hard earned money. Whether you decide to lend  money or not is up to you. Here are some tips that might help you take a decision –

  • Ask your friend why he needs so much of money? If he cannot give a genuine answer immediately, he’s hiding something from you.
  • Watch what he is answering! if he needs fund for a medical emergency, consider helping him. But if he needs funds to pay off another person from whom he has borrowed money or to settle some financial deals which you find is not proper, you need to think twice.
  • Search about how he has dealt with money in the past. Is he a reckless spender? Is he constantly in a debt trap? What has he done with his salary so far? Does he party all night and lives a lavish life ? If you are not comfortable with his life style and attitude, stay off. Politely say that you can’t lend him money.
  • If he asks for a huge sum which you cannot afford, say no immediately. Also if he’s asking funds because he knows that you’ve got a loan from elsewhere, do not lend.
  • Remind him about the money, just before the due date. Politely say that you’ll need the funds very soon. In case he couldn’t make the payment on that day, ask him when you can expect the payment. Let him say a date. Also make him explain the reasons why he couldn’t give you the payment as promised.
  • Based on what he has explained, set another date and time and tell him that he cannot miss the date this time. Always keep your cool and never let show any frustration. Keep a broad smile on your face while asking back your money. There should not  be any mistake from your part.
  • Still if things go worse, visit his home. Indirectly tell his parents / siblings / spouse that there’s some money deal between you and him. That would automatically create pressure on him.
  • If you really want your money back, keep pressing indirectly but at the same time never utter a rough word or show a frustrated expression. Once he gives your money back, it’s possible that you guys may not be friends any more. Carefully think if this situation is going to have any negative impact – at work place or between other friends.

Experts warn that loans given to friends or relatives can lead to strained relationships. With the following words, we sum up our advice about lending money to friends / relatives:

  • If you can afford to lose a friend, go after your money;
  • If you can afford to lose your money, lend as much as you can ;
  • If you cannot lose both, try to strike the golden mean!”

Leave a Reply