What to do when friends or family want to borrow money from you
It can be a real struggle knowing what to do when people ask you for a loan, especially if it’s a friend or family member who asks for some extra cash. Most of us want to help others in their hour of need but before you hand over the bucks, it pays for you to completely review the situation and seek advice from others.
The Debtfix Crew does come across people who have debt problems because they have lent money to friends or family, then the deal went wrong for everyone.
Will an informal loan cause financial hardship for you?
What’s your bank balance like?
Can you afford to lend someone money? Getting yourself into financial hardship is not going to help anyone.
Do you have a budget, and do you know what expenses you’re likely to have in the coming months or even years, if the person requests a large loan? You may be nearing retirement, about to start a family or saving to buy a home and being generous to a buddy may leave you out of pocket at a critical stage in your life.
The impact of lending money to family or friends goes beyond the moment when you agree to help them out, especially if you are generous enough to give them an interest free loan. If you can afford to lend money, it can be a great way to help someone you care about avoid high-interest loans and give them a hand up but check it won’t be a problem for you in the long run.
Are there other ways you could help a friend or family member?
Lending your mate some money may not be the best solution for their situation. It may be better to treat the situation with some tough love, which doesn’t mean being mean. Tough love is about setting boundaries and if you know family and friends are genuinely experiencing a hard time and you have the funds to help them, then that’s probably OK.
However, if there is more to the story and the person asking for the loan needs to deal with other stuff in their life maybe you shouldn’t give them a loan. You could offer to help by:
Giving them a bed in your home
Sharing food with them
Going with them to a budgeting service
Paying bills directly to companies they owe money to
Helping with kids clothing
Referring them to foodbanks, addiction services, problem gambling, etc
Referring them to Debtfix
Will you arrange a written loan agreement?
If you decide to become the bank of mum and dad or the bank of a good mate, it might be useful to draw up an agreement, so everyone knows what is expected. Consider the amount and frequency of repayments, as well as what happens if they need to stop payments, or you need the money back in a hurry.
Xero has some great guidelines on arranging loans between friends and families, especially if you need some money for a small business, but the guidelines apply for any informal loan.
How to say ‘no’
Some people find it easy to say ‘no’ whereas many of us really struggle, especially when we care deeply about the person asking for our help. Just Google ‘how to say no’ and you’ll find screeds of advice, which clearly indicates this is a challenge many of us find difficult.
Some key points to turn down a buddy or family member when they ask for a loan are:
Be clear about your ‘no’ e.g. “I’m sorry, my friend, but I can’t lend you money.” You don’t have to offer an excuse.
Express your gratitude, e.g. “That you’ve asked for help with money does means a lot to me.”
Set boundaries and stick to them, e.g. “I lent you $100 last month, and I can’t lend you more until that is repaid.”
Be polite, offer an alternative but stay assertive, e.g. “I can’t lend you money right now, but I will let you know if I can in the future.”
Consider the impact if you say, ‘yes’ or ‘no’. If saying ‘yes’ puts you in a bad place, financially and emotionally, you’ll need to be courageous when you decline to lend money to someone.
Is someone forcing you or someone else to lend them money?
Every now and then there are media reports of people being forced to lend or even give money to others, especially family members. Financial abuse happens in many forms and can include failing to repay a loan to straight out theft of money.
Often other friends or family members first notice something is wrong when someone struggles to buy essentials they can normally afford, because they are being financially abused. The abuse may involve a scam or fraud, and online romance scams often involve someone asking their victim for a loan. Don’t do it.
You can protect yourself from financial abuse by getting independent advice before:
Signing any contract
Making any big decisions, like selling your home
Agreeing to be guarantor for someone’s loan, that could mean you have to pay back their debt if they can’t
Lending money to people you have met online
Older people are vulnerable to family members and colleagues exploiting their money and other assets. If you need to contact someone about elder abuse there is good information here and Age Concern can also help.
If you are bothered by lending money to someone and you think they could use some FREE non-judgement guidance from Debtfix, share our contact details with them, now.