Lately I’ve received numerous emails and social media inquiries concerning how to handle constantly loaning money to family and friends or not being able to say “NO” to giving money to family and friends. Over 60% of the inquiries were because helping the family member meant not paying a bill or the lender emptying out their savings account. The biggest question people should ask is “Can I afford to do this?” Will it cause me to go in the hole this month? Get off track with my spending plan? Decrease my retirement fund? Or worse, do I have to borrow in order to give? Here are some steps to help you in making your decision.
1) Follow the best practices of the banking system. Don’t lend if you can’t afford to ever get it back.
Banks are smart in this respect. They do their due diligence in vetting who is “lend worthy” and who isn’t. Loaning money to friends and family can be like playing the slot machines or the lottery at times. You never know if you’re going to win or lose. Make it a financial standard to never loan money you can’t afford to let go and walk away from.
Make it a financial standard to never loan money you can’t afford to let go and walk away from.
2) Don’t mortgage your future golden years in order to help your friends and family financially.
Lending money to your family and friends is never a good idea if you have to dip into your retirement savings to do so.
3) If loaning the money causes you to keep a secret from your spouse, it’s NOT a good idea to loan it.
Communication can save you money and your marriage. If you and your spouse don’t agree on making the loan, it could cause major division and a house divided cannot stand. Amos 3:3 says:
Can two walk together, except they be agreed?
4) Think through the reason the borrower needs the money in the first place.
Are they asking to borrow money because of poor spending decisions or because of unexpected life situations like a job loss or medical bills?
5) Decide if you want to be an enabler or an empowerer.
If the borrower is consistently making bad financial decisions and have destructive financial habits, then poor planning of their part should not become an emergency on your wallet! You can be emotionally supportive without being financially supportive. Financial bailouts don’t solve financially dysfunctional issues, but helping them get to the root of WHY they have the bad financial habits will.
6) If you decide to loan money to family and friends, then put the terms of the agreement in writing. What wise institution loans money on a verbal agreement? NONE. There is a reason for that!
Since you have made the decision to be the banker, then be the banker. Once you have agreed on the amount of the loan, discuss the interest rate, loan term, payment due date, and late fees. You can use the loan calculator at www.bankrate.com to help you design the payment amount. Make sure you put all the terms of the loan in writing. By placing this in writing, it lets the borrower know you are serious about the terms of the loan and that this is NOT a gift, but in fact a loan, and helps to hold them accountable. Although they will know the terms of the agreement, this doesn’t guarantee they will operate with integrity and pay the money back. This is merely another layer of protection.
Make sure you put all the terms of the loan in writing.
7) Don’t be a co-signer!
If you can’t afford to pay the debt if the loaner defaults, then keep your John Hancock to yourself. Proverbs 22:26-27 says “Do not co-sign another person’s note or put up a guarantee for someone else’s loan. If you can’t pay it, even your bed will be snatched from under you.” Proverbs 17:18 says “It’s stupid to guarantee someone else’s loan.”
If you can’t afford to just give it away and it not affect your savings, retirement, debt repayment plans, and college savings for your children, or your relationships, then you shouldn’t give. You can’t be a blessing from an empty cup, yet so often many people give or loan when they can’t afford to.