How to Lend Money without Ruining Relationships
When you decide to lend money to someone in need, that's good, right? People react to this question in all kinds of ways – from outright aversion to approval, and all shades of emotions in between.
Many believe being broke is a result of idleness. They believe the so-called poor get what they deserve because they are picky about jobs, are irresponsible about money, and do not seek ways to improve their skills.
They are where they are, some say, because they refuse to pull themselves up by their bootstraps. “Why should we encourage loafers by loading them money?” they say.
Have we, as a society, really lost our desire to help others?
Laziness is not a good trait. People who are lazy and don't help themselves do not gain anyone's favor. But what isn't good about the phrase "pull yourself up by your bootstrap" is that it indicates how people have forgotten that everyone needs some kind of help in the beginning. Phrases like "people determine their own destiny" may sound good, but it's as if " those who have made it" have forgotten that they, too, needed help at some time.
Lend with a plan
There's an order to helping. Lending with no clear terms for repayment is more damaging than helpful. Forking out money to get someone out of your hair, with no interest for his or her future, is foolish. It breeds a culture of dependence and apathy.
When you don't make plans for repayment and commitment, you are more likely to see the last of the borrower after you signed your check. This is why there are so many ruined friendships, failed marriages, and destroyed family relationships arising from bad debts.
Practice good judgment
Not everyone is a deadbeat. The flipside is, not all borrowers deserve a loan. This is the part where good judgment is crucial. There is no hard and fast rule or easy barometer.
Friends or family members who don't save, don't work, are always out of money, but spend like there's no tomorrow are fiscal black holes. Lending might be more damaging than helpful, and end up ruining relationships. Ask yourself if lending is a band-aid for their problems or a long-term solution to their financial problems.
Another sticky issue is knowing if you have the capacity to give. We sometimes feel magnanimous, sometimes at a huge cost. As part of good financial management, financial planners recommend having at least three to six months worth of salary in the bank. This amount is not extra money. It is there for a purpose. Dipping into your emergency fund to help someone in need deprives your family of security. Dipping into your fund without your spouse's knowledge is disastrous.
Whatever you decide, understand that this is not just a money decision. It's really an emotional one. Knowing that should, at least, make you examine why you are giving assistance.
Write it down
Because lending is an emotional decision, it's best to run your plan through your financial planner or third-party professional before you give the green light. They can advise you on potential problems like cash flow, taxes, and penalties. They can help you get an objective look at the situation.
Keep the transaction business-like. Write everything down. If you don't feel comfortable going to a Notary Public, at least have it signed and keep it safe. If the borrower is your adult son or daughter, signing something in front of a third-party will drive home the point this is not something they can just make mom and dad write-off in the future.
Be clear about terms for repayment. Do it the way banks would, with an amortization schedule, an interest rate that ensures a fair return, collateral, if possible, and other appropriate conditions.
So, do lend a hand, if you must, but do it in order.