We’ve all been there. A friend or relative approaches us a little down on his luck. The bills are piling up and they need a couple hundred dollars to get through payday. It’s an uncomfortable situation for both parties. For the person needing the money, they feel the humiliation of admitting they haven’t been able to keep their finances in order. For the potential lender, it’s a feeling of having to weigh the value of personal relationships with financial necessities.
How do you handle such a situation? Because every situation is as different as the people involved, it’s impossible to create a precise set of rules about lending money to personal friends or relatives. However, there are a few pitfalls you can look out for.
First, even though the situation is awkward, don’t avoid communicating clearly about expectations. If you simply do not want to lend the money, for any reason you choose, be direct and up front about your reasons. If you come across as indecisive, or make unlikely excuses, like not being able to afford it if it’s obvious that you can, it simply makes the situation more awkward for you and more humiliating for your friend.
Remember, this is your money we’re talking about, so you can decline the request for any reason. You can simply say you don’t lend money to friends.
If you do decide to make the loan, be extremely clear about what you want in return. Tell them you expect to be paid a certain amount every week until the money is paid off. Or ask them for some collateral. After all, you’re granting this person a tremendous favor by lending them money. It would be unreasonable of them to be offended by such a request.
Another option is to lend the money with the expectation that it will never be repaid. Be extremely careful under these circumstances, and only make such a loan to a close relative, such as a child or sibling. By not expecting repayment, you protect yourself from feeling resentful down the road. And if you are ever repaid, you can consider it a surprise.
We would also advise anyone considering asking for money from a friend or relative to only do so in case of a dire emergency. If you do this every time you’re just a little short, you gain a reputation as someone who’s always asking for money. You’re better off trying to work out an arrangement with your creditors.
The biggest problem, when money becomes an issue within a relationship is that it tends to become the defining issue, especially if a loan is never repaid. That’s why many people simply refuse to lend money to friends. It’s because they don’t want to lose the friendship.
By communicating clearly about your expectations and needs, and not internalizing everything as a personal issue, you can almost separate your personal relationship from the financial transaction that has taken place. Otherwise, every interaction becomes a discussion about the money that is owed, and the discomfort forms a wedge between the two people.