THE DOS AND DON’TS OF LENDING MONEY TO LOVED ONES

Carefully consider these six tips before helping anybody out financially – even those closest to you.

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For centuries, philosophers, poets and economists have warned that lending money to friends or family can destroy relationships. One saying goes: ‘When friends become bankers, emotions become transactions’; another warns: ‘When you lend someone money, you often lose both the money and the friend.’

Why is it such an awkward issue? Firstly, it changes the power balance (you as lender will have the upper hand). Secondly, it can trigger negative emotions ranging from shame and embarrassment to anger or resentment if it isn’t repaid.

Yet this doesn’t mean that you must ignore all financial pleas this festive season. Of course, you can lend someone money if you wish. But to safeguard your own financial well-being, use these six tips as a guideline.

TIP 1: Find out the ‘why’
Sit down and have a clear conversation to find out if the loan is to satisfy a ‘want’ (such as electronics, a holiday or presents) or a ‘need’ (a medical emergency, house/ car repairs, to pay rent or to put food on the table)? Once you have a clear understanding of the reason, it’s easier to decide whether or not you would like to help.

TIP 2: Check if you can afford it
Do you have the amount your loved one wants to borrow? If lending the money would hurt you financially (so you couldn’t pay your own bills, risk your retirement savings or push you into debt), then you can’t afford it. Finance experts often advise to only lend others money that you can afford to lose. It doesn’t mean you need to gift it, but that it wouldn’t damage your own finances (and hopefully not your relationship either) if they don’t pay you back.

TIP 3: Be careful what you sign
Letting someone else open a credit card in your name or co-signing a loan instead of lending them money directly can also be problematic. “Co-signing makes both of you legally responsible for the debt,” says financial news site Investopedia. “If the other person defaults on payments, the creditor could come after you for payment.”

TIP 4: Review their borrowing history
Is the borrower trustworthy with money? Do they have the means to repay you (a salary or other reliable income)? Have you lent them money in the past that they ‘forgot’ to repay? These are important points to consider when lending money and if that’s the case, don’t expect them to repay a new loan. Either make the decision to not give them any money or treat it as a gift or favour.

TIP 5: Put it in writing
If you do lend them money, be clear about the repayment conditions. Both you and the borrower should sign a loan agreement documenting:

–  the amount borrowed
–  repayment schedule (when and how much)
–  interest rate, if applicable
–  duration of the loan (start date and final repayment date)
–  penalties for missing a payment.

TIP 6: Consider collateral 

“Consider asking for some type of collateral equivalent to the loan amount that you can hold as security until the loan is repaid,” advises Investopedia. This could be any item of value that you’d be able to sell if the borrower defaults on repayment.

Remember, it’s your decision whether you want to – and can – lend money to someone close to you. Don’t feel obligated if you can’t afford it. It’s better to say ‘no’ than to end up in financial trouble yourself.

Did you know?
43% of working South Africans had to borrow money from friends or family, according to Old Mutual’s 2023 Investment and Savings Monitor. 10% of 18-to-29-year-olds who had taken out any kind of loan said they needed the money to lend it to somebody else.

By: Silke Colquhoun
Photo & illustration: Gallo/Getty Images