Tough Love: Lending Money to Family & Friends
“Brother, can you spare a dime?” Here’s how to respond when family and friends put you on the spot
“A ready way to lose your friend is to lend him money. Another equally ready way to lose him is to refuse to lend him money. It is six of one and a half-dozen of the other.”
George Jean Nathan, the noted drama critic and editor, said that. Chances are your parents — like mine — repeated it in some form or another. Why? The thinking has been that whether we’re talking about friends and money or families and money, the two simply shouldn’t mix.
That was an easier line of advice to peddle, however, before the credit crunch. When mortgage dollars, credit card lines and private student loans flowed freely, you knew the person asking you to part with your hard-earned money could likely get cash somewhere else. Now, that’s not the case.
So, consider these tips for smart lending in the post-crunch environment.
See if you can dodge the bullet. Frankly, there is much that can go wrong in a loan between friends. Money can be paid back late or not at all. Terms can be misunderstood. Interest can be forgiven then tacked on, tacked on then forgiven. Parties can stop communicating for all sorts of reasons.
Here’s the first thing you should do when approached for a loan by a friend or relative: Offer to help with information instead. Volunteer to sit down with the person who needs funds and help look for loans from the U.S. Small Business Administration, a bank or elsewhere.
Next, consider offering a gift. It’s cleaner. It’s easier. And you can always say: “This is really all I have to give. I am pleased to be able to do it, but in return, please don’t ask me again.”
Suggest borrowing from a person you don’t know. Explain to your friend that a more anonymous source, like a bank, might make everyone feel more comfortable than borrowing from friends or family.
But as they search for anonymity, some people who are not able to secure a loan from a bank are turning to peer-to-peer lending Web sites. Advise your friends to use caution.
Before you or a friend in need consider using such online lenders, follow this advice from Rich Lunsford, a Certified Financial Planner™ practitioner with USAA:
• Research the lending site with the Better Business Bureau at bbb.org. The U.S. government has shut down some peer-to-peer sites until they meet federal regulations.
• Be aware that the online lending business will check your credit history, just like a bank, before making the loan and will turn you over to a collection agency if you don’t pay on time.
• Before signing the agreement, thoroughly read it and understand any fees related to applying for the loan, paying it off early or missing a payment.
• Pay on time, or your interest rate could jump.
Put any loan you make in writing. If you do go the loan route, the very best thing you can do is treat it unemotionally and as much like a standard business transaction as you can.
That means putting the loan terms — interest or no, repayment by the month or in full — on paper in the form of a promissory note that sets a rate on the loan amount. And consider consulting a tax or financial advisor for help.
Perhaps in your case things will go smoothly and you’ll feel that having a written record is icing on the cake. But if things don’t go well, having this sort of paperwork goes a long way toward preserving the relationship.
Jean Chatzky, award-winning journalist, bestselling author and motivational speaker, is helping millions of men and women battle debt. Her newest book, The Difference: How Anyone Can Prosper in Even the Toughest Times (Crown Business), debuted in March.
USAA, a diversified financial services group of companies, is among the leading providers of financial planning, insurance, investments, and banking products to members of the U.S. military and their families. For the past three years, BusinessWeek magazine ranked USAA among the top two “Customer Service Champs,” highlighting our legendary commitment of providing highly competitive financial products for approximately 7 million members. For more information about USAA, or to learn more about membership, visit usaa.com.
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