Shakespeare was apparently on to something when he wrote that lending money to friends often resulted in the loss of both the friend and the money.
Money is an emotionally charged issue that has torn apart many a relationship. â€œBlood may be thicker than water, but money can be the great divider, even in a family,â€ said Gail Cunningham, spokesperson for the NFCC. â€œOne NFCC Member Agency reported a situation where a father put up his house as collateral for his sonâ€™s business. That business is now failing, and the situation has put a lot of stress on their relationship and may ultimately result in the loss of the home,â€ Cunningham continued.
The NFCC offers the following suggestions when deciding whether to lend or not to lend:
- Just like in Vegas, donâ€™t risk more than you can afford to lose. Loaning money to friends or family is a gamble, so never make a loan if itâ€™s going to put your own financial situation on the skids. However well-meaning the individual is, none of us knows what tomorrow holds. Only loan the money if youâ€™re comfortable with the idea that youâ€™ll never see it again.
- Involve your spouse/partner in the decision. Communication could not only save you money, but could save your marriage or relationship. If you and your spouse donâ€™t agree on making the loan, it could result in significant stress on your relationship.
- Evaluate the impact the loan will have on other family members. If you loan money to one child, youâ€™re setting a precedent. What if other children are not as responsible, thus the risk of them repaying a loan is greater? Be prepared to deal with the potential strife such a situation could create within the family.
- Consider the reason the borrower needs the money. Do they want the loan because of an emergency like loss of job or unexpected medical bills, or because they made poor spending decisions? Will it be used for something that will improve their life, like a down payment on a home or education?
- Donâ€™t be an enabler. If the borrower is engaged in a destructive lifestyle, and is habitually in financial hot water, be emotionally supportive rather than financially supportive. A better use of your money would be to pay for professional counseling to get to the root of the problem, as bailing them out of their current crisis wonâ€™t address the underlying issues.
- Put all the terms of the loan in writing. Many Web sites offer free promissory note forms. One such site is Internet Legal Research Group at www.ilrg.com/forms/promisry.html, where you can find promissory note forms for each state. Consider having the documents notarized, as this will give you more legal standing if the borrower defaults. While putting it in writing is smart because it makes the borrower more accountable, be aware that it wonâ€™t guarantee you will be repaid. Itâ€™s simply another layer of protection.
- Divorce yourself from making judgments on the borrowerâ€™s spending decisions. When someone owes you money, itâ€™s difficult not to watch how they spend their money, particularly if theyâ€™re behind on payments to you. Fixating on their frivolous spending can drive a wedge between the two of you. Inquiring about their plans to get back on track with payments is justified, but resist the urge to grill them over where the money has gone.
Before entering into such an arrangement, it is wise to sit down with an independent third party to see if there are options that havenâ€™t been considered. An NFCC Member Agency has trained and certified counselorsÂ that review peopleâ€™s financial situations each day. To find the agency closest to you, call (800) 388-2227, or go online to www.DebtAdvice.org.