“Neither a borrower nor a lender be” in this new year BUT…
As yet another holiday season fades away into beautiful memories shared with loved ones, the importance of family becomes more obvious. For some, the season presents the only opportunity to have fun and frolic time with the ones they care about.
Connecting with family and loved ones makes our hearts full, and for some, family is not an important thing. It's everything. No matter what, your family makes up a huge part of who you are.
However, in today’s economic environment, a lot of families can face difficulties making ends meet. As a result, the ‘well-to-do’ in the family often face situations where other family members approach them for financial assistance.
Lending money to a family member or friend is a risky proposition, one that could end very badly; you could lose your money and wreck an important relationship.
“Neither a borrower nor a lender be.” These famous words came from Polonius, Shakespeare’s chief counsellor to King Claudius in Hamlet. As Polonius gives some fatherly advice to his son Laertes, Shakespeare gives some timeless advice to us: Do not lend money to family or friends.
Why shouldn’t we lend money to friends and family? Polonius answers that in his next line: “For loan oft loses both itself and friend.” Polonius knew that a loan to a friend or family member often results in the loss of both the money and the relationship.
Nonetheless, when someone you love is in a serious bind and you have the means to help, it can be impossible to say ‘No’. Therefore, a way out of this bind is to be smart about setting up the terms and a schedule for repayment with your family. As long as you and your money stay protected, lending to someone you love is feasible– even if it isn’t necessarily advisable.
Always get the full details
While you might be anxious about hurting a loved one’s feelings, you need to know where your cash is going to decide if it’s worthy of a loan. A bank would never blindly hand over funds without knowing what it’s being spent on, and neither should you.
If a family member becomes offended, take it as a red flag that it’s not a deal you should make. And if you are provided details, follow up on them.
The perception most people have is that money will solve all problems in life and that isn’t always true. It doesn’t always deal with underlying financial issue at hand, sometimes lending the money just masks the real issue.
It will be worth finding out what is making them need financial help especially if a particular family member is fond of borrowing.
Instead of lending money, you can even help in other ways when you understand the underlying problems like allowing your kids to move back in with you so they can cut back on rent and utilities freeing up some funds for them. You can also employ a qualified family member if that is where the problem stems.
This side job may go a long way toward helping them earn the money they need to pay their bills and help you finish up any jobs that you've been putting off. Treat the arrangement like you would any other employee, that is spell out clearly the work that needs to be done, the deadlines and the rate of pay. Be sure to include a provision about how you'll deal with poor or incomplete work.
These can prevent some of the hostilities that can develop as a result of defaulting a loan.
Deal With Cash Only
If a family member requests that you co-sign for a loan or any scheme, shut it down as soon as possible. Never put yourself in a position where someone else’s actions could affect your ability to borrow or secure credit in the future. You can control cash, and lending it won’t directly affect your credibility. If a loved one asks for help, only deal with cash or politely decline.
Also, always consider the ‘gambling’ saying “you should never bet more than you can afford to lose.” The same can be said for lending to a friend or family member. Since the money might never be paid back, you need to decide on an amount you will be willing to forgive in order to save the relationship– so, if GH₵5,000 could break you financially, don’t lend it. Even the most well-meaning loved one might fall on hard times and default.
Discussions about money with family members can be awkward, especially if you’re in a position to lend. But not going over the details can possibly hurt you both. Make sure that you clarify the amount being loaned, the interest rate, the repayment schedule, and late fees well in advance of any money changing hands. Charging interest to a family member might seem unnecessary, but it’s the fairest way to protect yourself. Interest rates usually inspire people to pay back loans in a timely manner.
Immediately getting the terms out in the open reduces the possibility of any future miscommunication or confusion. You need to talk about a plan of action, be it late charges, a collection process, or legal action. This sets the standard for the business relationship, so you both know what will happen if the deal goes sour.
You should consider giving the borrower periodic reminders (monthly, quarterly or annually) so they know you are expecting the repayment. It also helps you to know in advance if there may be problems which may cause them to default.
Most importantly, make sure to get all agreements in writing. Having written details that both parties agree to by signature is also a great tool to prevent misunderstandings. Should legal action ever become necessary, a written contract protects you far more than a mere handshake.
Consider the Impact
When you lend money to a family member, you impact just about everyone else you’re related to. Allowing one family member to borrow and not another could drive a wedge into your relationships. Other family members might see favouritism or enabling, so seriously think about how going through with the loan will make others feel.
If you’re a parent considering loaning money to a child, it might even be a good idea to call a family meeting to discuss the terms openly. That way, none of your other children will be confused or hurt by the decision.
One of the biggest mistakes you can make when lending to friends and family is to micromanage that person’s spending after you’ve made the loan. Once you’ve agreed and closed the deal, the money that you lend is no longer in your control– obsessing over how it’s spent will only bring about problems. Separate yourself from the money and focus on repayment, not on how it’s spent.
Build it into your budget
If lending or giving money to a family member is something you are obligated to doing often, build it into your budget so that you can make provisions for the loan you are giving without disrupting your other expenses and money goals.
This also takes away the element of surprise by making you prepared for such situations. You have to ensure you put your hopes on money that is due but you haven’t received.
When to Say No
If you aren’t comfortable with the lender-borrower relationship, it may be in both your best interests to decline your loved one’s loan request. Money can be a serious force in driving apart friendships and family relationships, so trust your instincts and simply decline if you feel uneasy about the deal. Perhaps you can help in other ways: offer a small cash gift, buy groceries, or find other service-based ways to lend assistance.
Another thing to note is that, it’s not advisable to lend money to family members who are engaged in shady activities or addicted to substances. Giving them funds can enable their behaviours and you simply can’t throw money at people who do not want to change.
There is not enough money in the world to help them and you are not helping them, you are participating in their insanity. The funds will not help them get dignity or a future and you could get into trouble with the law.
There’s no guarantee a family loan won’t bring disappointment and conflict, but that won’t stop us from helping the people we love the most. If you agree to lend money to family, having a plan is the best thing you can do. Be sure to make sure to set expectations, draw up a contract, and make sure your spouse or close relatives are aware that the loan is happening.
To the borrowers, if you fall behind on a loan from a loved one, it is important to keep the lines of communication open. Good communication is the best way to avoid hostility with family and friends who have loaned you money. Like it or not, a person lending money feels like it’s an investment. They want to know how the project or business is doing and whether this loan is going to be paid off.