Have you ever loaned money to a friend or family member? I’m not talking about the little $5 “I need to buy some lunch” loan here, I’m talking about the “I’m behind on my bills”, “My car just died”, or “My cat needs an operation” loan of hundreds, or even thousands of dollars.
If so, how’d that work out for ya?
Did you end up getting paid back or are you still waiting, hoping against hope, for that money to somehow find its way back to you, maybe even with interest?
When it comes to making personal loans to friends and family, too many people don’t realize just how these kinds of loans can be fraught with difficulties that may not be readily apparent when you first decide you want to make the loan.
Trust me, I speak from experience.
When someone close is in need of help, it’s only natural to want to pitch in. Why is that?
There are several reasons:
- We want to help- It’s natural to want to help someone we care about when they’re in a tough situation. When someone is in need, and we can help, it makes us feel good.
- We’ll feel guilty if we say no- You know if you don’t help someone who is struggling that it will weigh heavily on your conscience.
- You want to maintain the relationship- You feel like you can’t just refuse to help, after all, this is someone close to you, and not loaning money could cause tension in the relationship because you weren’t willing to be helpful in their time of need.
All of these reasons show that you want the best for that person and for the relationship, but what happens when things don’t work out as planned? What if they don’t pay back the loan (which happens more often than not, by the way)?
Worse yet, what if they make no effort to pay it back and then weeks or months later they’re showing you their expensive new clothes or the latest gadget they just purchased? Do you think the relationship would change a little bit or a lot due to the resentment of not getting paid back?
When it comes down to it, lending money to friends and family rarely works out well because it changes the dynamic of the relationship from one of family or peers to a relationship of creditor and debtor, which can get very uncomfortable when the loan never gets paid back. Nobody wants that kind of resentment in their close relationships.
So how do you handle the situation when someone close comes to you and asks you to borrow money? The best thing to do is to say “no”.
But there are things that you can do in addition to saying no that can still be very helpful to someone in a tough situation and allow the relationship to flourish despite your refusal to help with Fluffy’s surgery:
- Offer to give them the money- Only do this if you can afford to do without that money. That way there is no expectation of a payback and the resentment that follows when they don’t.
However, I don’t think it’s a good idea to give them money if you know they have been totally irresponsible in some way and you don’t think they will use it to move forward responsibly. Bailing someone out rarely works, they need a behavior change.
Don’t contribute to their stupidity, and don’t put yourself in a bad financial position trying to cure it.
- Offer Advice- If you’re good with money and know of a good solution to their problem without digging their debt hole deeper, then show them how they can work through the situation and come out much better on the other side by making a plan.
- Refer them to Peer to Peer lending sites- If they still insist on borrowing money to clear up their problem, there are several websites (such as Prosper.com) where individuals can borrow money from groups of people who contribute to the funding of the loan and you pay them back over time just like you would pay back a bank
Think of it as a bank where thousands of people lend money to thousands of borrowers, with Prosper being the middle man who processes payments and provides the necessary documentation to make it all legal.
Although I don’t recommend taking out loans, if they insist on doing so then this might be a good option when the bank and smart friends and family say “no”.
When someone that’s close to you comes asking for a loan, you should always remember that good relationships are much more valuable than money.
There will always be plenty of emotional arguments for wanting to lend the money, but in the end there are just as many ways you can help someone out without straining, or even destroying a meaningful relationship.
So resist the urge, and find a better solution without digging the debt hole deeper.