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Checklist: Loaning Money to Friends and Family

Loaning money

The School of Hard Knocks

Sometimes you can become an “expert” in an area of life by learning from the School of Hard Knocks versus a real brick and mortar educational institution. That is the case with my topic this month as I share some healthy advice about loaning money to family and friends from Beth Terry, CSP (with her permission) at www.bethterry.com, speaker, author, and coach.

Turning the Table

I am often sharing with women the best ways to “tell your assets where to go” via account titling and beneficiary designations. This month, I am turning the table to talk about when someone else is asking for some of your assets. Whether you have ever felt like the Bank of Mom and Dad or found yourself deciding if your generosity will be a gift or a loan, we have all likely been approached or at some time at least considered this subject during our life.

Questions to Ask Yourself

Beth has found that if you are in a position where you have some discretionary funds and someone you care about asks you for a loan, there are some questions you need to ask yourself before responding:

1. Am I absolutely, positively, 100% sure that I will never, ever, ever, ever have a downturn, an emergency, a disaster, or an unexpected huge expense that will require a significant chunk of my resources? (have you compiled an inventory of your financial resources? Download My Net Worth Summary)

2. Am I willing to risk losing this friend or family member over this loan if they fail to, refuse to, are unable to, or forget to repay me?

3. Am I willing to treat this like a business transaction – with a loan document, compound interest charged, regular recaps of the loan amount provided and a statement in writing that being in arrears with this loan will because to report this person to collections and/or a credit agency?

4. If this person is a good risk for ME, why is he/she not a good risk for the bank or credit union?

5. Other than making me feel heroic for a moment or two, what is the upside (benefit) for me to loan this money?

6. What is the downside to saying no? Is my friendship with this person so fragile that refusing a loan will be cause for ending the relationship? If it is, then why would I loan him/her money in the first place?

7. What is this person’s history with me as far as keeping promises, being responsible, and staying responsive to my requests?

Once you have honestly answered these questions, she suggests you will likely come to the same conclusion each time…your answer is “no.”

Breaking the News

Here are ways to say No:

1. I would love to and I can’t.

2. I’ve already earmarked that money for another project.

3. That money is already invested and I shouldn’t pull it out.

4. That doesn’t work for me, I value our friendship too much.

5. I don’t have as much extra as you think I do. (Best not to gloat about your financial status and you might not find yourself in this position in the first place!)

Be firm. Be loving. Brevity is your friend. Never offer to loan money to anyone unless it is money you are sure you don’t need and you will be okay financially and emotionally if you never see it again.

If You Said Yes

Loaning money to friends and family is the surest way to end those relationships. Not only is it dicey to collect, but it also makes you suspicious and you may find yourself questioning every purchase they make until they pay you back.

For whatever reason, if you do find yourself loaning money, she has found that you must stay on top of the payments — require they pay you something every month, even if it’s only $10. And send them a recap on a regular basis.

Final Thoughts

Finally – if you value your friends and family, don’t borrow money from them either!

Disclaimer: These tips are based on personal, very sad, stressful, resent-filled and frustrating experiences with loaning money to friends/family “for one year – PROMISE!” Then, years later, she either saw it paid back in dribs and drabs (with the borrower renegotiating the interest rate without telling her) or not at all.

For other articles related to women and money, I invite you to visit the other articles on my blog. And while you’re there, feel free to comment on other topics you would like to read about.

Marie Burns is a Certified Financial Planner, Speaker, and Author of the bestselling Financial Checklist books. Find Marie on Facebook or contact her at Marie@MindMoneyMotion.com

This article was first published at 60 and Me – a community that helps women over 60 live happy, healthy and financially secure lives.

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