Some things to think about Before You Make that Loan
Loaning money to family or friends is tricky. While helping someone dear can be meaningful or feel obligatory, the risks — in the event things go sour — include heartbreak, financial hardship and possibly losing an important relationship.
The following tips can help weigh whether the risk of making a loan is in your — or your borrower’s — best interest. First, remember this rule of flying: make sure your own “oxygen” supply is secure before trying to help others. Also keep in mind that past events and behaviors are the greatest predictor of future outcomes.
Ask yourself:
- Is this a person of good character who keeps his or her word?
- Is he or she typically stable, or are financial or other crises common?
- Is this person sensitive to how their actions affect others?
Answer these questions honestly. If you’re considering loaning to someone frequently in need, you may feel pressured by feelings of guilt, obligation or that this person won’t survive without your help. These feelings are tantamount to blinders.
Most know the proverb: Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime.
It’s true! Ask yourself if your well-meaning help might do more harm than good. How could it? By robbing someone of the opportunity to grow. The struggle to work out a problem builds important “muscles,” like problem-solving skills, confidence and dignity.
While saying no can be painful, it can be far more valuable than a temporary, quick fix. Solving a problem for someone and taking away their pain eliminates the need for him or her to learn how the problem occurred and that he or she could have resolved it. Further, “fixing” nurtures a sense of entitlement — that whatever messes they get into, someone will fix it. Allowed to work out a problem, a person begins to Grow. And that’s a good thing!
After pondering these questions, if a loan does seem reasonable, consider the following to help minimize risk.
Document the terms of the loan (interest rate, payment schedule, duration, etc.) and have all parties sign. Imagine every potential hiccup, such as late or nonpayment, and include how it would be handled, be it a penalty or calling the loan.
While this may seem excessively formal, it’s important to treat any loan agreement between family or friends as a business transaction to protect both parties. Depending on the loan amount, or simply your comfort level, it may be wise to consult a financial or legal adviser well-versed in this area.
We all want to help a friend or family member in financial need, but please don’t if it might jeopardize your peace of mind or financial security.