should I lend my friend money
3 things to avoid when borrowing & lending money
Borrowing and lending money, to or from people you know has the potential to lead to problems.
Families can be left in tatters, marriages ended, life-long friendships ruined forever. It’s awkward and uncomfortable if they can’t pay you back and that’s not even considering the actual debt. You can never predict and prepare for all the things that could go wrong, creating financial risk for everyone involved. The new situation created from the borrowing becomes far greater than the money issue itself.
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At The Real Debt Guy, we have developed our own Borrowing Code that you can follow, to prevent these situations from arising. There are three important rules to follow:
- Do not lend money to anyone who always needs to borrow money
- Do not lend money that will cause you an issue if the money is not paid back
- Do not take out borrowing for someone else
RULE 1: Do not lend money to anyone who ALWAYS needs to borrow money
The key word here is always.
If someone always needs to borrow money, it’s highly likely the root cause of the problem, is the way they are spending their money. People who always need to borrow money are often spending beyond their means. Take Rich for example, in our article, ‘Keeping up with the Joneses’, he was trapped in a cycle of credit card debt, spending wildly beyond his means. The last thing he needed was a friendly handout from one of his friends, to feed his problem. It would only have added more debt and more problems. As a friend you might think you are doing a good thing, but how is that person expected to pay you back?
If you do lend it, you may find that they continue to ask you any time they feel the need to borrow. The minute you lend that person money, you become an option. It sounds harsh but it’s true. Be prepared to become the go to person, again, and again, and again. Each time their financial problems grow in size. You’ve essentially become their credit line.
It might feel awkward at the time you refuse to lend the money, but this is nothing in comparison to what could happen. If you refuse to lend someone money in this situation, encourage them to find a way that doesn’t mean borrowing more.
RULE 2: Do not lend money that will cause you an issue if it is not paid back
If you are seriously considering lending someone money, only ever do it if you could survive without getting that money back. There is a high risk you won’t see that money again, which leaves you financially vulnerable. It's a gamble, and the number one rule of gambling, is to never gamble what you can't afford to lose. The same rule applies here. Once the money changes hands, it’s out of your control. If you need that money back, it should be a no go in the first place.
Never lend money and put yourself at financial risk. It makes no sense for you both to be struggling financially. It also makes no sense to put that strain on your relationship. If we’re talking about a partner, or a close friend, you must put your emotional attachment to one side. It’s like the old saying goes, ‘you’ve got to be cruel, to be kind'.
RULE 3: Do not take out borrowing for someone else
This is a rule never to be broken. It is far too important. It carries the most risk both financially and emotionally.
Here’s a story of a young couple, Matthew and Sarah....
Matthew had a life dream to start his own business, but he didn’t have the finances to get started and he was already carrying some debt. Having complete faith in her partner, Sarah took out a £15k loan for him. This money would clear his debt, and even leave him with a pocket of money to get his business up and running. However, the relationship was only 6 months old.
Not long after the loan was taken out Sarah and Matthew separated. Then Matthew seemed to disappear off the face of the earth. With only a handful of payments made, Sarah was left with a loan in her name, with growing interest every month.
Sarah didn’t even see the money, yet now she has to pay back every penny.
Situations aren’t always this severe, but it shows what is at stake. The loan is in your name, you owe the money.
If you’re taking a loan out on behalf of someone else, or asking someone to do this, stop and ask yourself why? It’s because the person asking for the money cannot afford whatever it is they need it for and this is the problem. Borrowing more money for someone will not necessarily fix their issues. It will just create new ones, for them and now also for you.
Borrowing & broken relationships
Combining relationships and borrowing money come with huge risks. When you break up with a partner, or fall out with a friend or family member, it’s usually because something has caused the relationship to breakdown. The trust is no longer there. This is a big thing to consider if you’re still considering borrowing on behalf of someone else. If anything was to go wrong in your relationship, you will be relying on them to ‘do the right thing’. Could you say with 100% confidence that they would?
If the answer to that question is no, you’re putting yourself at risk. If the answer to the question is yes, it’s important for you to know that relationships can change and so can people. The company you are borrowing money from, only knows you. They don’t know you are borrowing it for someone else. It is only you they may take action against when the payments default. It’s only you that may be at risk of a CCJ should the debt not be managed properly.
Relationships can breakdown in business too. If you’re taking out a loan to help your partner or a friend to set up a business, treat it like you are an investor. Make sure you own part of the business and make sure the loan payments are setup to be paid to you monthly. Most importantly, make sure you are legally protected should anything go wrong. Business with friends and family, is still business.
Don’t leave anything to chance.
Don't forget to read The Real Debt Guy's final thoughts below!