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With the economy in the hole and job losses mounting, many people could use extra cash – and may ask turn to friends and family for a loan. While some people regularly accept money from parents, others may be asking for the first time. This is a sticky situation.
“There’s the potential for personal problems and financial trouble when it comes to lending to those close to you,” states a recent USA Today story. “Experts advise you to treat the deals like the business transactions they are.”
I agree. I would have to be in a real pinch with no other possible solution in sight to ask for a loan from my family, partly because I have seen the other side. My parents have been the lenders and family ties have been broken because of money. The USA Today story advises how to avoid personal problems. My advice is simpler – don’t do it.
If you are considering loaning or borrowing money from a friend or relative, however, here are five suggestions to protect yourself and your relationship.
1. Make it your last resort – Before asking for a loan from a friend or relative, try cutting costs by saving on eating out, cutting out unnecessary utility bills, or getting a second job. If you are the lender, try to help the person by helping them find a second job or being helpful without expecting anything in return.
2. Put it in writing – As the USA Today story suggests, treat it like a business transaction and write out a contract making sure both parties understand the terms of the agreement. Include what the interest rate is and the payback terms.
3. Consult a lawyer and tax professional – Make sure to run the contract by a lawyer to make sure the terms are legally binding in your state and a tax professional to figure out the appropriate interest rate for the amount of the loan.
4. Be honest with your lifestyle – While the loan is outstanding, make sure you are not living a life of luxury as ill feelings may be stirred up in the person that loaned you the money. Life a simple life and don’t go into more debt until the outstanding loan is paid off completely.
5. Mum’s is the word – Awhile-back Bargain Babe wrote about helping out a low-income friend and spoke to an etiquette expert who said one of the no-nos of giving to a friend is telling others about your generosity. Keep it on the down low because the recipient might not want others to know.
Welcome to Bargain Babe! I’m Mara, and I’m so glad you’re here. I am an obsessive bargain hunter and penny pincher, and I am determined to live a full life without EVER paying full price.
I lent money to a close friend about 18 years ago. I typed up a Promissory Note which he signed, worked out a payment schedule and he kept to it, funds were paid back in full over the time period specified, which I think was 2 years.
Maybe I was lucky. Personally I would hate to ask friends/family for a loan. It would be the very last resort.
I’ve seen this before; a person borrowed money from a friend and ended up taking lavish trips, buying all sorts of unnecessary gadgets, etc. and still hadn’t paid the friend back! This is very risky so I agree: make sure it’s your last resort.
@Briana Thanks for sharing your experience! I think it’s key to realize that when you loan a friend money, it is really a gift if you value the friendship more than getting paid back.
@bargainbabe: If the borrower truly is a friend, part of being a friend would be to honor and pay back what was understood up front to be a loan. If the “friend” doesn’t pay back and forces the loan to become a gift, then I would question the value of the friendship. Shakespeare was no dummy with his well-known pronouncment: “Neither a borrower nor a lender be . . .”
I was burned on two loans to a “friend” of 35+ years. She was being evicted (or so she said) and I sent her $700 and then $500. I was a single mom with a deadbeat ex so I really could not afford to help, but I felt sorry for her. I never saw a DIME of this money repaid! I asked her several times and she said she would send me $50 a month. Never sent anything. Then she claimed it was a GIFT and that I had never specified repayment.
I learned the hard way–do not give anybody anything unless you can truly afford to call it a “gift” and not expect repayment. You WILL get burned!!!
I was burned by my sister who moved into our Mom’s house shortly after she passed away. I was paying property taxes and homeowner’s insurance on Mom’s house and my house and my sister promised to pay me back for paying taxes and insurance on the house. That was in 2003 and I’m still waiting to be paid back. Would I do it again? I don’t think so. Sometimes trying to be the good guy ends up hurting you.
@Grace: What’s the current status of your “friendship”? Sounds like it’s over–is it? Had she ever previously given you doubts about the friendship?
@Diana I wonder how much having a contract and specific repayment terms increased your chance of getting paid back. Who knows, maybe you just got lucky.
As @Grace learned the painful way, you have little recourse if the person refuses to pay you back and you have nothing in writing to prove it was a loan.
I’m embarrassed to admit that I asked my sister to borrow money to buy a computer in college. She considered it and politely asked me how I planned to repay the loan. I didn’t really have a plan. Now I’m glad she turned me down!
Said “Friend” also went on a CRUISE while she still owed me the $1200.00. When I confronted her about her ability to pay for a vacation while owing me money, she got defensive and said, “You of all people should be supportive of my need to get away after a difficult divorce.” !!! I haven’t seen her since, and we were close friends (best) since high school 35 years earlier.
If you want to lose a friend, lend (or borrow) money!!!!
@Grace: Was this the first (and obviously last) time she hit you up for money? Any other clues in this 35-year-old friendship that perhaps she wasn’t such a good friend? I’m interested in how a long and close friendship can unexpectedly unravel.
I linked to this this weekend. Great points made!
Please never let your opinions and insightful knowldge be squelched, shaped, or distorted. The information you provided here regardless of its complexity or simplicity has made a major impact on my epistemological groundwork and will not be forgotten. Livestrong blogger!
Say what, separate Says?
Did anyone else besides me look up “epistemological”? Never thought I’d get a dose of philosophy on this site!