Lending Money – Tips for Success

Lending money is tricky to say the least. Like anything else, it’s best to do it well or don’t do it. It’s something we’re bound to be faced with, so let’s be better prepared.

Some of us get into trouble by lending money to others. It’s a common occurrence. We often see such requests coming from people who have trouble managing their own money, and we see it more often during challenging economic times. It can lead to uncomfortable situations between people, especially if you’re not prepared. The trick is to have a plan to deal with the situation before it presents itself. When someone comes asking for money, you’re better off if you’re prepared to respond.

This means you need to have your own policy about the matter.

I am reminded of a time when I wanted to make an unexpected and rather large purchase at a garage sale, but didn’t have the cash on hand. I was with two of my friends, one of whom I was riding with and another who happened to stop by to say hello. Both knew that I was going to come back to make the purchase, and both reached into their pockets and offered to lend me the money right on the spot. The unspoken understanding was that I would be paying them back almost immediately because their loan was a matter of convenience for me. This type of short-term loan is commonly offered among friends, but it’s not what I want to talk about because generally those type of loans don’t lead to trouble.

What I’d like to address are longer and more serious loans that are requested by others, perhaps even by individuals you might only consider to be an acquaintance or casual friend. That’s where many of us can get into trouble. Unlike the situation noted above, these loans often involve individuals who approach you for money, not out of convenience but out of necessity. As such, they can be much more difficult to deal with. Most of us would like to help, it’s a natural response, but it’s not always a good one.

Here are guidelines for responding to requests from others for use of your money. Adopt one or more, and they might help keep you out of trouble the next time someone comes asking for cash.

“I don’t lend money to anyone, ever.”  That’s pretty simple and straight-forward. Every business operates based on a set of policies…so can you.

“There are three places to go for a loan, in this order: a bank; a family member; a life-long friend. I’m not any of those to you, so I’m sorry, I won’t lend you any money.” This is a relationship approach that gets acquaintances, casual friends and neighbors off your back.

“When I lend money, it’s done with a formal agreement, interest applied, and a schedule of repayment. If you can demonstrate your ability to make payments, then we can talk about it. Otherwise, I won’t consider lending you money.” This puts it right up front that you’re all business. This also gives you the right to demand proof of employment, expenses, and a history of being responsible with money. In the absence of that, it’s understandable why one might be unwillingness to take a risk.

“I don’t lend money, but if there is something else I can do for you, I’d be happy to consider it. Do you need food, transportation, help around the house, a temporary place to stay?” This is how I deal with those calling me for donations. I eagerly offer services instead of money, and they drop me like a rock. I wonder why?

“What collateral are you offering for the loan?” This reduces risk on your part and shows the borrower that you’re serious about getting your money back. Once I loaned $40 based on a set of gold-plated proof coins that sell for about $135. They’re mine now. I was happy with the outcome of that deal.

The key to remember is that you worked hard for your money, and therefore it represents your time, effort, skill, knowledge, initiative and the financial wisdom necessary to preserve it as part of your personal wealth. If you’re going to lend it to someone, it has to be done with all of that in mind. If the recipient isn’t going to appreciate the full value of your money, then it’s probably best to just decline the request.

Keep in mind that your money is a resource. That resource can be spent, wasted, given away, put at risk or invested. Generally, I look at things like this as an investment. I think about what kind of return I might get on my investment. Is it a closer friendship, a grateful neighbor, or perhaps it’s a favor that you can have returned to you one day in some other form? If we think carefully about such matters, we might more often than not conclude that the individual and their circumstances creates a potential risk that far outweighs any return that we might reasonably expect.

Remember, it’s your money, so you decide. Sometimes it takes exceptional courage and mental toughness to decline such a request, and you might feel bad about it, but it sure beats regrets about having lost your hard-earned money because you didn’t take enough time to think things through. One of the best low-cost investments you can make is a little time to formulate a planned approach to dealing with such matters. If you’re known to be an individual of means, you’ll likely face such a request. It’s only a matter of time.

photo credit

About Clair Schwan

7 Responses to “Lending Money – Tips for Success”

Read below or add a comment...

  1. Chelle says:

    I take the “never loan money to other people” policy. It is hard for them to understand, but it is what I’ve found works best for me. I would much rather give people money straight up than to have to worry about whether or not they will pay me back.

    • Clair Schwan says:

      Chelle, this is a good approach, one I want to address in a separate article. If you “give it away” then there are no expectations with respect to someone owing you, being late on payments, etc. The problem, of course, is once you feed a dog, it’ll likely come back.

      My experience shows that if you refuse to lend someone money, they’ll go elsewhere and keep searching until they find someone who will or decide on another more responsible alternative. In any even, it’s your perfect right to stand your ground and protect your best interest. If everyone did that, we’d be much better off.

    • Brad Chaffee says:

      That’s the same method I use too Chelle! Lending money to people changes the relationship and more times than not ruins it. I’ve given people money as a gift but I will not loan anyone any money. Plus, how could me, the Enemy of Debt, loan someone money? “I hate debt, but I’ll loan you — my friend — money. If it’s bad for me and my family it’s bad for my friends too. 🙂

  2. We never lend any money and if anyone ever asks we will just say it’s not in the budget. We don’t like to have to ask for it back and it ruins relationships. We’ve had that happen once in the past and that’s all it took to say No. When I have debts to pay… I don’t have extra money to give away, unless of course it’s family and it’s an extreme situation as family comes first.

    • Clair Schwan says:

      It’s clear you have your plan in place. I too would consider family needs first, and they’re probably the only ones I would consider if the need might arise. But, I also pre-qualify my family members, so I don’t have to decide on the fly…I’ve already decided based on their current behavior and attitude towards money. I think it’s a smart thing to do, and it’s all part of my “what if” planning. I find things run more smoothly if I anticipate and plan for decision-making instead of trying to do it under pressure of the moment of urgency.

  3. I did the I don’t loan money to a family member, but then supported them with a check for 2 years as a gift.

Leave a Comment...

*

This site uses Akismet to reduce spam. Learn how your comment data is processed.