Tips For Lending Money Wisely

by Jacques Sprenger on 2009-05-0311

Before you lend money to family, look into some of our tips for handling the situation.

I had a couple of negative experiences that were related to doing business with or loaning money to friends and relatives. My advice, if you have not yet suffered from these consequences, is to just DON’T DO IT! Just give the money (as a gift) and forget about it.

But most of us are easy prey for those friends and relatives who beseech us to lend money, and who appeal to our sympathies to give them a discount and/or make them partners in a business. Whether or not you feel generous enough to help, here are a few pieces of advice on how to handle these requests:

Tips For Lending Money Wisely: Doing Business With Family and Friends

1. Refer a borrower to a peer to peer lending network.

Here’s the easy way out. If you’ve got family wanting to borrow from you because you’re an easy target, nowadays you have a way out. You can always refer them to a peer to peer lending network like Lending Club or Prosper, where people purposely provide funds to lend money to those who need it.

These peer to peer companies check on the credit ratings of borrowers who sign up, and assign a risk rating to each loan made; while willing lenders size up notes to find out which loans to fund. This way, you don’t have to look at lending as an obligation you hope to avoid (especially if you think you won’t get paid back!) but as an activity you can possibly earn some money from, through investments in debt notes.

To see how much you can make as a potential lender, check out this article on Lending Club investment performance and loan returns.

2. Put it in writing.

lending money, lend money

Make sure everything is in writing, even if the person you are helping doesn’t like the idea. Stipulate all the details, including the timeline for repayment or doing some kind of work in exchange. Some people are reluctant to demand written commitments from those they like or who are related by blood. Nevertheless, do it. There is a saying in French that says “Les bons comptes font les bons amis” (good accounts make good friends). Those people who find themselves burned trusted their friends or family to honor a verbal contract. Unfortunately, a lot of details get lost in the translation and the only way you can prove your position is by having things written down (for the benefit of both parties).

3. Communicate with the borrower.

Do not fail to apply the screws if your borrowers don’t pay on time. If they are really your friends, they will understand that coming clean is the best policy. If you’re having trouble collecting on a loan you’ve extended to a family member (and there’s always that black sheep), discuss the problem with your spouse and think of a plan to settle the problem.

4. Be flexible and get creative!

If you see that the person — friend or relative — is clearly unable to repay you, sit down with him/her and work out a new agreement (in writing, of course), and find an easier way for them to comply. You may even settle for work in exchange for repayment. I once had this happen when a relative admitted to me that he was unable to repay a personal loan that I had extended to him. Since he had some handyman skills, we worked out an agreement wherein he’d do a few important repairs to my house in lieu of debt repayment. It was a great resolution to a dicey problem! You know the saying: if there’s a will…

5. Be upfront and transparent.

If you run a business, and you’ve got family and friends who come by as customers, you may want to keep track of the discounts and perks you “lend” out to them. Aunt Thelma got a 25% discount on a brand new sweater, and Aunt Emily received only 20% on a pair of gloves. Try to explain why one got a better price than the other, even if your reasons are valid.

6. Don’t be a pushover.

Know when it’s time to call on some tough love. You may be a generous person, but let your family and friends know that you also have limits. If there is anyone you know who keeps turning to you repeatedly for monetary help, you must be careful about how you manage this relationship. Stand your ground if this individual asks for too much, and ask yourself whether it’s worth working out an agreement with this person. Like anything else in life, this may take some negotiation; or perhaps tough love is the answer!

7. Just give it away.

If you are a professional who charges by the hour — perhaps you’re a lawyer, doctor or psychologist — don’t even consider charging your loved ones for a piece of professional advice. It’s pro bono (or discounted) for close friends and immediate family. For the rest of your clientele, tell them that you’ll be happy to give them credit tomorrow, not today. Mixing business and friendship will always end up in a murky pond, unless you clearly define the parameters before starting.

Copyright © 2009 The Digerati Life. All Rights Reserved.

{ 11 comments… read them below or add one }

Mark May 3, 2009 at 11:56 pm

Always put everything in writing. Give yourself at least eight weeks to consider. Make your family member come to you with a professionally made and edited business plan for three years, This puts it into their mind that it is a real business that has to succeed on its own merits and not just a hobby.

get a lawyer involved at the start. A business contract should be drawn up, edited and SIGNED at a lawyer’s office, this establishes a paper trail at the beginning. People like to bring lawyers at the end , but smart people bring them in at the beginning.

David May 4, 2009 at 7:11 am

I agree with you, if we lend to family or friends, we have already know that maybe the money won’t come back, and better use legal document if it can.. thanks for tips, David.

Lara May 4, 2009 at 7:12 am

Good ideas altogether. If you want to put it in writing, there are several companies that allow you to do it for a flat fee.

I love the idea of sending your friends and family to Lending Club, especially because they give you a $25 bonus for referring them. The only potential problem is that it only works for excellent credit folks. But if they qualify, you can lend them a partial amount and let the community do the rest.

Steve Rhode May 4, 2009 at 7:26 am

I’m really glad that I was sent a tweet with this post. I retweeted it. I think your advice about lending to friends is wonderful and should be read by many. There is nothing worse than wanting to help a friend, only to resent them latter for not repaying you as you would have hoped. You are, truly, much better off giving the money as a gift and not expecting it back. I remember one guy I was helping who gave money to a family in his local community. Every time he saw them at the high school football game, buying a hot dog or a soda, he would be upset that they were not giving him that money back instead. Helping can lead to hurting unless you face it with reality or you use the advice given in this post. Great advice.

Steve
@GetOutOfDebtGuy

Kristy @ Master Your Card May 4, 2009 at 12:07 pm

These are all very good tips and if I lent money to friends and family, this would be something I’d follow to the ‘T’. But, the fact is, I simply choose not to lend money to friends and family. First of all, I’ve seen what my siblings do with the money my parents “lend” them. My dad is still waiting on money to be paid back from years ago – but he keeps on lending, so that’s his own fault. The most my friends have ever asked me for is $100. I just gift it to them in that case. They can take me out to dinner sometime when they get back on their feet, if they want. But, I don’t want the hassle of worrying over whether I’ll get it back or not. It’s not worth losing a friend over.

Jacques Sprenger May 4, 2009 at 12:17 pm

Thanks, Steve, allow me to return the compliment. I checked your free advice on how to get out of debt and you give hope to some desperate people. However, when cornered, there is nothing you and I can do, short of loaning them the money they need. Now if the bailout money were only available to hard working folks who are only asking for a break; but of course, they are not too big like AIG and politicians are simply not interested in ordinary people; they don’t contribute to their campaigns. So maybe a non-profit org could do something for them; something like the Gates foundation for education. Thanks again for the double tweeting:))

Mikael @ RetireRichRoadmap May 4, 2009 at 1:52 pm

I have to agree with Kristy. I would never lend money to friends or family. I would gladly give it away but I would never want to be in a situation where I would potentially loose a friend over money that they couldn’t/wouldn’t repay.

/Mikael

jim May 4, 2009 at 6:11 pm

Remember to charge the proper amount of interest as required by the IRS, if you want to keep it legit. If you don’t, well, you can do whatever you want. :)

EscapeSomewhere May 8, 2009 at 2:09 am

My experiences with renting property to people I know has been pretty negative. Since people know you they are more likely to not make their monthly payments because in most situations they figure there is not a high risk to them not paying.

I guess if one is going to make a loan they should think about what they are going to do when the borrower doesnt pay. Are they really go to sue their sister. If the answer is no it might be best to avoid giving out the loan.

I have one family member that is pretty financially astute though. We have both made loans back and forth over the years which has been helpful. Its been more of a case of “I have money tied up here. Can I get a loan to avoid taking it out of long terms cds” so the risk on both sides has always been pretty low.

Meaghan May 11, 2009 at 4:06 pm

Lending money to family or friends is always tricky. Putting it in writing is key! and only lend an amount of money that you are comfortable “losing”.

Goran Web Design May 12, 2009 at 2:14 pm

Murky pond indeed. The surest way to test the strength of a friendship is to toss money into the ring! Money evokes emotion that is best dealt with in a neutral state of mind, and not as a friend or loved one. Rather give it away, or give a little bit to help out, methinks…..

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