Before You Loan Anyone Money Read This

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Most everyone has heard, “Don’t ever loan money to family or friends”.  I too had heard this age old advice, but I made the decision to ignore its heed.

Stupid me, because it’s proven to be right more than it has proven to be wrong.  In my early adult years I loaned money to loved ones and a roommate, who I thought was a friend, and learned the hard way.

I learned that it isn’t worth it.  Most people paid me back and their loan in full, but I also was left without payment a few times.  Those few times where I wasn’t paid back in full were tough on me.

It hurt that someone would accept MY money to pay for THEIR debt, and never pay me back fully.  I also felt stupid for trusting them at their word.  Their failure to pay back the money they borrowed from me ended up causing trust issues with me.

And although these incidents could be viewed as opportunities to forgive, they were more so and continue to be personal struggles with forgiveness.  Don’t get me wrong I totally think forgiveness is the key to moving on, but it’s not easy.  It’s also not easy to rebuild relationships.

Truth be told these failures on both parts (their failure to pay me back & be truthful and my mistake of trusting their word and not saying “no”) has damaged or ended a couple of relationships.

This is why we often hear “Don’t loan money to family”.  If the loan goes sour, then the relationship is often ruined.  I know with me this is true.  Someone not paying me is enough for me to write them off and never speak to them again.  I’d rather have nothing to do with them to be honest.

Now while friends or roommate relationships may end naturally anyway down the road.  These friendships definitely end on a sour note when one doesn’t pay back the other.

So don’t be naïve like me, avoid writing a check to friends or family.  Learn from my mistake(s) and just say “You don’t feel comfortable” or “That you’re relationship is too precious to risk”.  If they also care about you, then they should be willing to accept that.

Here are some TRUTHS to help reassure you that it’s okay to say “No”:
  1. Trust has nothing to do with it and doesn’t always determine who will and won’t pay.
  2. Don’t feel guilty one bit if your family member or friend tries to make you feel bad about yourself for declining or saying “No”.
  3. Their personal finances, aka debt, are not you’re responsibility, they’re theirs.
  4. Dealing with debt on ones own can be a HUGE learning experience and many times is best for others to avoid getting involved.
If you’re still in disagreement here or choose to experience it for yourself, then please consider the following before you loan anything:
  • Treat them like a bank would

Ask for and look at the individuals spending habits, credit history, history of bill payments, financial past, etc.  They should have nothing to hide, because if they are there is your red flag.

  • Get collateral

Ask for a material item(s) that is of equal of similar worth to the loan that they agree is yours is they don’t pay their loan in full.  Don’t only ask for it, but have it in your possession.  If you have to trust them with your money, then they should be fine with trusting you with their valuables.  Besides its incentive for them to pay you back.

  • Monthly payments

Ask for payments toward the loan to be made monthly; even if the amount starts small and gets bigger in time.  This helps ensure you get some of your money back and that you don’t lose more interest.

  • Charge interest

Why shouldn’t you make money?  Ask for interest and possibly increase the interest over periods of time to help persuade the individual asking for a loan to pay you off sooner.  It can be whatever you feel is fair to the both of you.

After all you could have your money invested elsewhere and be gaining interest or at least not losing anything.

  • Create a physical loan agreement

Ask them to sign a loan agreement with terms you are comfortable with.  Include the date signed and due date, both your signatures, amount of money, amount of interest, etc.

Remember to keep the original copy and give them a copy.  Could even get it notarized, for more security.  Also, don’t avoid doing this because you feel the loan is considered too small.

  • Loan only what you can afford

Ask them what the bare minimum they need after they state an amount and go along with that.  You can read whether or not they are lying better than I.  Remember loaning money out is risky, so only agree to an amount you can stand to lose.

  • Think- “Don’t loan money to family or friends.”

Ask them what they think of this quote?  If you don’t like they’re answer well then there’s your sign.

At the end of the day you should really listen to your gut and go with it.  If you don’t feel comfortable with the idea, then walk away before the worst can happen.  It’s not worth the cost.  And not everyone deserves to borrow your money.

I know that in my case I’m done with allowing family and friends to borrow MY money.  It’s not a mistake I want to make in the future and I will not be that sucker again.  So goodbye family and friend loans forever!

Case and point “You shouldn’t loan money to family or friends”; instead direct them to their local bank or credit union to set up a loan meeting.  Whether or not they go will tell you how bad they really need YOUR money.

Comment below:  Have you ever agreed to loan money or borrow money from a loved one?  Do you care to share your experience?

Tawnya is the founder of The Dancing Dollar, a blog about frugality & personal finance.  She writes about how frugal living can help other individuals & families live [happily] below their means.  She & her husband are on the path to pay off their home in less than half the time.  Click here to learn more.