I learnt this the hard way.
At least I thought I had learned it, but life realized obviously hadn’t, fully so it gave me another very clear and very expensive opportunity to finally understand…
… lending money to friends and family is NEVER a good.
I’m talking about that kind of lending where somebody comes to you and says:
- “Hey, can you just lend me a little bit of money, I’ll repay you soon”;
- “I’m having a tough month can you lend me money and I’ll pay you back as soon as I’m paid”;
- “I’ve got myself into a little pickle, I just need a bit of help to tide me over,
- “I’m a little over extended but I’ve got big plans to make loads of money, I just need help to help me make it happen”
Maybe it’s your kids that keep borrowing from you, and I’m talking about adult kids. Perhaps it’s a colleague at work, an employee, a sibling, a friend – it doesn’t matter who it is, it’s never going to be good for them, for you or the world, for you to lend them money.
We’ve all had situations where there’s someone in our life who always seems to “
need” not “wants” to borrow money.
There is another kind of lending you might consider, and I’ll cover that later, but what were talking about here, it the borrowing to cover poor financial management on the part of the lender.
What to do if someone asks to borrow money?
DON’T DO IT!
Find another way to help, preferably an empowering way.
Give them a copy of The Wealth Chef book!
I do not lend money to friends and family, or anyone – full stop.
Please understand this, as soon as you lend money, and somebody borrows from you, you have changed the dynamic of that relationship, irrespective of how “evolved and conscious” you might think you are or how unattached and disconnected you can be.
“Neither a borrower nor a lender be” are the famous words spoken by Polonius, Shakespeare’s chief counselor to King Claudius in Hamlet, to his son Laertes.
Why shouldn’t we lend money to friends and family?
Polonius answers that in his next line: “For loan oft loses both itself and friend.”
Polonius knew that lending to a friend or family member often results in the loss of both the money and the relationship.
If somebody is truly in a difficult position, if somebody is on a financial knife edge where that if you don’t give them money, and you are their only option because they don’t have an emergency fund in place in place, they might really end up in a devastating financial hole, then, and only then consider giving them money. Notice I used the word GIVING, not LENDING. If you are able to spare that money, give it.
If that’s the situation, and you’re feeling pulled to help someone, consider it a gift and don’t expect it back.
If you still need convincing, here are 6 reasons why you should NEVER lend money.
#1 You’ll probably never get paid back
Nearly three quarters of people who borrow money from friends or family never pay the loan back in full. Rather than expecting to get paid back, you should view the loan as a gift in your mind. Chances are you’ll never see that money again, so only lend as much as you are comfortable parting with.
#2 Family and Friend Loans are open-ended
Loans to family and friends tend to be open-ended. The parties don’t reach an agreement for a timeline for repayments, and don’t include interest on the loan. Lenders don’t know when their money will be returned, and borrowers don’t know when to repay the loans.
This leaves both parties in limbo, and doesn’t set any expectations. The uncertainty can lead to stress as the borrower may worry that the lender expects payment and the lender worries about when he or she will be repaid.
If you must lend money to a family member or friend set up a timeline and a schedule for repaying the loan. The timeline provides a final deadline for total repayment of the loan and the schedule provides them with guidelines for making monthly payments. For example, “John, I’m going to lend this money to you, and these are the terms and the repayment schedule. The whole loan will be repaid by December 31st and it will be paid in installments of $400 a month with the final installment being 31st December.”
#3 You might need the money
Unexpected emergencies and income losses happen. And when they do, you’ll need extra money to pay your bills and stay afloat. If you have an extremely well stocked emergency fund , then maybe you won’t miss the money that you lent out.
But only a quarter of Americans have more than $10,000 in their savings account, in the UK it is estimated less than 30% of the population have £8,000 or more in available savings and in South Africa the estimate is less than 17% of the population have R10,000 or more in cash savings. Draining your savings or your emergency fund to help out a friend could leave you in the same position as them in the near future. That’s not going to be good for anyone.
#4 Having to repeatedly ask for overdue payments will get awkward
Since most loans are never repaid, there’s probably going to be a point where your friend or family member falls behind on payments. When that happens, it’s up to you to follow up with them about their late payment. And that conversation is going to be incredibly awkward.
But it gets worse. They’re likely going to keep falling behind on payments. And you’re going to have to keep following up with them each time to let them know they’re late.
#5 You Enable Instead of Empower Your Friend or Family Member
When you lend money to friends or family members, you give them an easy way out of their financial problems, instead of helping them work through their issues and become financially empowered.
If you’re being drawn to consider lending money to your adult kids, your friend, your somebody else, ask yourself these questions:
- “Am I doing this because I want to be liked?
- “Am I doing this because I want to be seen as the hero, “the rescuer, the helper-out?”
It can be really difficult to ask these questions honestly, because at some level, all of us have some co-dependency issues. We are all working on the areas where some of our self-worth is derived from other people liking us, by not upsetting people, being afraid of rejection, or conflict, or that they’ll be angry.
Where your own worthiness is be interwoven with somebody else’s ‘happiness’, and if you’re noticing a pattern where you lend money to either appease some sort of guilt about having money, or believing that lending makes you a nice person, then maybe, just maybe, your actions, and your need to be liked, or avoid conflict, or be loved, or seen as generous, is actually dis-empowering the other person. Perhaps your need is keeping them dependent on you.
By lending you are preventing them from having to learn how to be great with money and gain empowered money skills, so they don’t need to go around borrowing from people.
This can be a real hard self-inquiry, but you’re not here to just exist. You’re here to live a wealthy, healthy life, and being able to dive in and look at your relationship with money and worthiness is one of the key aspects of having that.
Instead of lending them money, teach them money skills.
Give them skills to transform their relationship with money for life, instead of a one-off, quick appeasement of the pressure you might feel.
#6 These Types of Loans Don’t Earn Interest
Lending money to friends and family costs you money and a lot more than you think. Most likely, you won’t charge interest if you give a loan to a loved one and as we’ve already discovered you most probably won’t get the capital back either.
If you invested the money instead, it will grow and grow, so by lending you not only lose the base amount, you lose all the earning it could have made for you if you had turned it into an asset.
Lending to invest is a different matter entirely.
If someone wants to borrow money from you to start a business or expand on something they have created, a whole different set of criteria and considerations come into play. These are the same criteria you should use when considering investing in a start-up.
Firstly is this something you believe in, something that can add value and something you believe will work?
Secondly, do you understand the fundamentals and understand how this idea, this thing will make money.
Warren Buffett advises to “Never invest in a business you cannot understand.”
Thirdly, get a solid loan agreement in place. That means in writing and signed and checked by a Lawyer. At a minimum this loan agreement should include:
- The term of the loan? How long it is for.
- Whether interest is being charged and if so at what rate?
- What are the repayment terms?
- How will the loan be secured or guaranteed? If you are lending to a company entity, negotiate that the Company Director (the person borrowing from you) will stand personal surety for the loan. If they won’t they are basically telling you they don’t believe in their ability to repay it and that should be a red flag to you.
Finally, stick to the agreement. Don’t betray yourself by entering into an agreement and then not being prepared to enforce it.
If you’re brave, in the comments below I’d love to know:
- Have you have lent or borrowed money in the past, and with hindsight realise, it impacted the relationship or there was some kind of funky codependency thing going on?
Share it with us as a way to unpack the why you lent or borrowed and what you’ve learned from it as as result.
Creating a great relationship with money is how you get money working for you, serving you, and supporting you – so you can get on and live your greatest, most empowered life.
Keep taking it step by step, be brave, empower yourself and then others and remember to have loads of fun along the way.
P.S. Why not invite your friends and family to take the “Squeeze The Juice” Challenge FREE with you today!
Together you can get to grips with your money stuff and in just 30 days you will free up at least 15% of your current expenses WITHOUT reducing your quality of life!