If you haven’t experienced it already, you may one day. A friend or relative is in dire straits and asks you for a loan. In some cases your instincts might tell you right away how you feel about the request. If the person is a loved one with a genuine need you may be only too glad to help out. But if this person spends recklessly and always looks for hand-outs, you may be dead against supporting their undisciplined lifestyle.
The more difficult situations are those in the grey area when you’re not quite sure what to do. It’s a very personal decision, but some issues and guidelines may help you figure out your approach.
Start by assessing whether the amount affects your own financial plans. If the loan is smaller, you may have no issue. But if the friend or relative is raising capital to launch a business, you must determine if the loan interferes with your own savings and goals.
You may be concerned that word will get out about the loan and you’ll be perceived as the lender of money to other friends and relatives. The potential snowball effect could dissuade you from helping more than the loan itself.
Perhaps most important is to imagine how you’d feel toward your friend or relative if the loan is not fully repaid, if at all – even if the borrower still intends to pay you back … eventually. If you imagine there being resentment, you may need to weigh a good deed for a close person against the possibility of a damaged relationship. If you foresee no ill will, and your friend or relative is in a difficult situation, you might even consider giving the funds as a gift.
You may want to involve your spouse in determining your course of action. The discussion could help in your decision and it can only be beneficial if you and your spouse are in agreement.
Unless you have reason to leave the loan open-ended, you may be more reassured making the loan and the borrower might feel more comfortable accepting the money if you both establish repayment terms. The amount could be repaid in instalments if that's helpful, or in full if the borrower is just waiting for an expected lump sum to come in.
When your cash situation is the reason you don’t want to make the loan, you may find it easier saying no to your friend or relative. Otherwise, you may want to explain that the reason for not making the loan is nothing personal. You understand that money issues can jeopardize friendships or relations with family and that’s not a chance you want to take – with anyone.