When to say no to lending
If lending money puts you behind, the reply must be a convincing no, said Cindy Marques, certified financial planner and CEO of MakeCents. That’s because you might not give you the option to get the a reimbursement, she said. “It’s fair to assume that you may not get that money back,” she said. “If you can’t afford not to get that money back, then you definitely shouldn’t lend the money.”
Refusing a loan is not selfish if it’s to your detriment, Marques said. You haven’t got to elucidate why you may’t – just say you may’t afford it.
Emotions play a vital role in the choice, said Brooke Dean, founding father of BMD Financial Ltd. at Raymond James. “If you become resentful or afraid or constantly thinking about this friend or family member owing you money, that’s actually going to impact your relationship,” she said. “You probably shouldn’t do it.”
What you must consider before lending to family or friends
But when you resolve to borrow money, you have to first understand the necessity for it — whether for coping with an emergency, for investing or starting a business, or for leisure, Marques said. Each of those three scenarios requires a distinct response. For example, if it’s only for fun, Marques suggests being careful and snooping around a bit to know why they need it.
It also will depend on how much money is being asked for. If it’s an amount that covers dinner, not getting it back will likely make or break you. You could have a look at it as a present and let it go. However, for a bigger sum, formal proof is required that records how much was borrowed and the way it can be repaid, Marques said.
Dean said the language of the promissory note may very well be so simple as stating the quantity and the expected return time, equivalent to one 12 months or five years, and whether the repayment could be made in installments or a lump sum. It can also be possible to comment on the interest on the quantity, but that is unusual amongst friends or family, she said.
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Be honest: are you able to afford it?
Where the cash comes from also determines whether you may actually lend it out. “Did you take it from your own emergency fund? Did you take it from your travel fund?” Marques asked. “Or was it just sitting there, just excess savings or investments, you had no specific purpose for it?”
Withdrawing money out of your emergency fund means you may’t afford to treat it as a present and need it back as soon as possible. For money that isn’t urgently needed, the repayment period could also be barely longer. “It’s very subjective and you have to look within and decide for yourself: Does this money have a purpose and a time?” Marques said.
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You can have bailed out your beloved just a few times without seeing any repayment, and there is a risk this might change into an exploitative pattern, experts warn. Marques recalled a client who was burned by a member of the family, however the client brushed it off. Soon, increasingly relations turned to her for money, knowing that there could be less pressure to offer it back.
“She was not in a financial position to lend money to anyone, but she felt pressured as if it was her job to do so,” Marques said. “I had to remind her, ‘No, absolutely not… When I look at your finances, the math is very clear: You’re hurting and you just can’t afford it.'”
Dean said people should listen to warning signs, equivalent to past repayment failures or bad habits equivalent to addiction or gambling. Asking yourself how well you understand this friend or member of the family and whether you trust them will aid you resolve whether you need to help again.
Often, she said, people have to intervene and refrain from enabling the behavior. “Unfortunately, sometimes not lending the money affects the relationship, which can be difficult,” Dean said
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