I was recently speaking with a friend of mine, and she mentioned a straightforward way to deal with family and friends that ask for personal loans: Don’t lend it unless you want to lose it.
Seems a little harsh, right?
No, it’s good advice. In fact, at BDF, we often counsel clients on the merits and pitfalls associated with helping people with loans, gifts or a combination of the two. To be clear, I’m referring to personal loans someone might request from you. I am not talking about annual gifting or one-time cash amounts someone might offer to a charity or non-profit.
When clients at BDF ask us about the sometimes-sticky situation of personal loans, it really comes down to expectations. If you’re willing to loan someone money, you should be prepared to part with those funds forever. We’ve said this before; we don’t want our clients to become the “Bank of You”. Banks foreclose on properties, require collateral and have underwriting processes. Not many individuals can execute on these three actions.
Here are three guidelines to consider as you think through the idea of lending money to someone important to you:
- Set Boundaries – put in writing the loan amount, scheduled payments, loan term and interest rate. Do not be afraid to formalize the loan situation further by having the borrower sign a personal note in doing so. It sounds more formal than might be necessary, but you’ll be setting an appropriate boundary.
- Establish a Payment Plan – make it very clear (again in writing) when you are to receive principal and interest payments. Consider providing a ledger of those payments received (or missed) and share that information annually or quarterly with the borrower.
- Keep them Honest – if your borrower misses a payment or comes up short on what your written expectations are, let them know. Send them an email or something in writing that states your acknowledgement of their misstep. Silence on a missed payment is acceptance.
If you’re not willing to do at least these three things, you should consider if gifting makes more sense than loaning money.
We all want to help others in some small or even wonderful way. Don’t let your desire to do good end up creating an unpleasant situation for you.