“Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.” - Hamlet Act 1, scene 3, 75–77
Perhaps Polonius had the right idea? When a loved one asks for money, it can put you in an awkward position. As Shakespeare warns, loans can end up costing more than the money — they can also damage relationships and enable other’s bad financial habits.
Still, it’s hard to say no when a loved one is in financial need. There are no easy answers to this dilemma — that’s why lending money to family members and friends is still a hotly debated subject in the financial media. Here’s what experts say you should do if you’re asked for money.
Ask the right questions before you decide
It may be tempting to agree right away, but experts warn to take time to think it over and discuss it first. For instance, consider:
Can you afford it? Yes, you should put your financial well-being first. The sad fact is a lot of loans to friends or family aren’t repaid promptly — if they are repaid at all. Most experts warn to lend only as much as you’re willing to lose. Even if your recipient is reliable, an emergency or extenuating circumstances can get in the way. Some experts suggest making a gift rather than a loan, and be mindful of what you’ll be sacrificing now and in the future.
Drawing on your nest egg or emergency fund is a also big no-no as it can put your own financial stability at risk. Also, watch out for “opportunity costs”. That $10,000 loan could cost you significantly more when you consider lost investment income.
How will it affect your relationships? Some experts take the above advice one step farther: don’t loan money to someone who’s relationship you can’t afford to lose. Lending money changes relationships and often breeds resentment, and the consequences can extend to other family members too. For instance, how will the loan affect your relationship with your friend or relative? How will you feel if the loan isn’t repaid promptly? Will you be able to “let it go” if you see the money being spent on non-essentials?
Also, be aware that you could be setting a precedent. If you help out one child, will his or her siblings expect the same courtesy? If you loan money to one friend, will others ask too?
Why is the money needed? Unlike the bank,you won’t have the person’s financial statements and credit score to help you weigh the risks so you’ll have to ask some tough questions and consider how trustworthy your loved one is. Have a frank conversation with your potential borrower and find out why they need the money and what they plan to do with it. The money could help start a new business, pay for someone’s education or help someone who is struggling temporarily due to a job loss or illness.
