Being in a reasonable financial position, I want everybody around me to also do well.  I know where I am and where I want to go.  Unfortunately, some friends of mine are in the opposite boat.  They do not have their financial lives together and do not know where they are are or where they are going.

Deep down, I want them to make the right choices and come on a similar journey to the one I am making.  I also know that they are not going to, and usually the worst thing I could do for our friendship would be to give them money to turn things around.

… usually the worst thing I could do for our friends would be to give them money to turn things around.

Friends usually get into financial trouble over a period of time.  It does not come up unexpectedly.  The signs are usually there for anybody who is watching: deferred maintenance on vehicles, problems cropping up around the house do not get fixed quickly, or you notice their spending habits changing for the worse.  A quick and easy fix of more money is not going to fix what caused the problem initially.  If the underlying financial activity that got them into trouble in the first place is not changed all more money will do is delay the final meltdown.

Even if the extra cash is enough to get them out of trouble, the loan can cause worse problems.

In My Heels knows this. She puts it well saying:

“It’s age old advice for a reason.  The problem with lending money to loved ones is this:  If you lend serious cash to someone you care about, you still expect it back right?  Sometimes the people we care about expect the relationship you have with them to excuse or “forgive” loans that you have no intention of forgetting about… especially if you can’t afford to.  Tempers flare, words fly like knives, and those knives sever relationships.  Sometimes those wounds heal, and sometimes the damage is permanent.

So, what should you do?  For starters, say NO.  Be nice about it.  Explain that financially you cannot support the loan without putting yourself into a bad position.  You can offer to help them non-monetarily.  Perhaps offer to go over their budget with them or help them look at their financial big picture to offer suggestions.  Maybe offer to make a gift of a visit with a financial planner who will do the same but with more authority than you have.

If You Decide to Say Yes Anyways

Should this not be enough deterrent, and you want to say yes, ask yourself the following questions:

  1. Can I afford to not get this money beack, ever?
  2. Am I willing to forgive this loan to save the friendship?
  3. Will they sign a promissory note for the full amount?
  4. If it is for an asset, will they accept a lien for the loan amount?

If you cannot answer Yes unreservedly to all of these questions, you should not make the loan.  End of story.

If you can answer Yes to all of these questions, proceed with caution.  You must ensure that both parties see this as an ordinary business transaction.  Otherwise, if your friends get into financial trouble later, you will be the first obligation that they ignore.  They will trust in your kindness to overlook them not paying you back.  It usually will not be malicious.  But they will expect you to understand and to be fine with it.

That will be where the friendship begins to unravel.  Let it go on long enough, they will forget about the loan completely and you will feel misused and abused.  The friendship will be poisoned with a slowly burning drug.  You will begin to see slights and insults where there were none before.  They may begin avoiding you out of guilt.  Eventually, you will drift apart if the friendship does not simply implode.

That is why it is better to not loan the money yourself.  It can work out great.  It can strengthen your friendship or family ties.  More easily, it can straing and destroy those same ties, and much faster.

If You Need to Borrow

If the situation is reversed, do everything you can to avoid borrowing from friends or family.  If the situation requires that you do borrow, follow these rules:

  1. Treat it as a business arrangement - because it is
  2. Review your own financial situation to ensure you can repay the new obligation - be honest
  3. Behind food, shelter, and clothing make this obligation your top priority
  4. Pay it off as early as possible.
  5. Sign a promissory note and allow a lien to be placed to secure your friend’s position.

Offer these things without asking.  Money is worth less than friends and family.  Do everything you can to prevent money from getting in the way.

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