Have you ever been approached by a friend or a family member who requested to borrow money from you? Sometimes it can be a really uncomfortable situation. I think that if someone asks to borrow money that you should proceed with caution. According to a survey done for CouponCabin.com, money ruins 1 in 5 friendships.
To help avoid ruining a friendship, one of the things that you should consider is shifting the language of the request. Think of lending money as a gift and not a loan. The reason is to avoid the expectation that you will get that money back. If you get the money back then great, but if you don’t then you won’t be disappointed. This may be the only way to preserve the friendship or relationship.
I generally avoid lending money with the exception of spotting a friend for food or activities that we are doing together, but if you do decide to gift the money, before you do ask yourself these 5 questions.
Can I afford it? Remember that this gift is now an expense so can you afford an extra expense or will this put you behind on your bills or obligations? If you loan this money, then you need to be sure that it won’t put you in a financial hole. If your job is at risk, then just say no. If you can afford it, and you are frequently asked for money then set a budget for gifts and do not exceed it.
Do I have a better use for this money? Let’s say that you can afford it and the gift will not put you behind in your financial obligations. However, do you have a better use for that extra money? Could you do something just for you? Is there an organization that could better use it? Could you use the extra to get ahead of your financial priorities? Look at the opportunity cost (the next best use) of the money before you gift it to the person asking.
Why is the person asking? Is it a one-time request or is the person asking because they are unable to manage their own money? For example, I know someone who was having a difficulty paying her own bills because she was lending so much money to family and they weren’t paying her back. The bad thing about it was that they were spending their money to fund their bad habits, and when they ran out of money they ran to her to ask for help with paying bills. It was hard for her to say no because she loved her family, but it also wasn’t sustainable financially. Therefore, when a person asks for a “loan” to pay their bills, you have to understand their behavior, and whether you will be indirectly funding their addictions or bad habits.
Will this make the relationship awkward? The problem with lending money is that it indirectly creates a business type relationship. If the person is having difficulty repaying, it can make family or social gatherings awkward. No one wants to talk about money, and it’s awkward to ask for the status of repayment. One or both parties may begin to harbor resentment. The lender may get upset if repayment takes too long, and the borrow may get upset if the lender asks about the status of the loan. Setting clear expectations up-front will help, but with money things can get awkward very quickly.
What else can you do to help? If a person is unable to manage their money through budgeting or finds himself or herself in a difficult position due to bad habits or uncontrolled spending, then “lending” the money will only make you an enabler. Therefore, see if you can help them get the help that they need to better manager their money in the long-run to avoid being in this position again. If the person is looking to start up a business, then maybe you can offer to use your skills to help them with their start up. If they have lost a job, or have run into hard time then maybe they can move in rent-free if they are having difficulty with rent. This way you can avoid giving a direct cash loan, but still feel comfortable that doing all that you can to assist them through this time.
If you do decide to lend and not gift, then set clear guidelines for repayment including the expected date of payoff, interest terms, and monthly payment amounts. Even then you may only see a partial repayment, but at least this sets the expectation and provides a paper trail in case you need to go to court to recover your funds.
Be sure to leave a comment to let me know how you plan to use these tips. If you have a money lending story, then please be sure to leave a comment to share your experience.
Aisha Taylor is a #1 Amazon Best Selling Author of the book “5+5 FNPhenomenal Ways to Save $100 This Week Without Killing Your Lifestyle”, the Founder of FNPhenomenal (Frugal –n- Phenomenal), and creator of The Live Phenomenal Program. The Live Phenomenal Program is a program designed to give you the tools that you need to totally transform your finances, and stop living from paycheck-to-paycheck. It’s time for you to be Financially Phenomenal! Book your complimentary 20-minute financial clarity session with Aisha here.
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