First, let me start this off by saying that you shouldn’t be lending money to anyone unless it’s completely disposable income, as in, the sort of income you’d use to buy a video game or some such thing, not the income you’d use to feed yourself or pay your mortgage. Regardless of the situation they are in, only give the shirt off your back if you can afford to buy another one for yourself, no matter how badly you feel for them. If there is a friend or family member that ‘just needs to make rent for this month’ when you care barely afford to pay yours, help them out by researching their options and giving them valuable advice instead of the money from your pocket.
With that said, I have little reserve in lending money to friends or family, providing the right conditions are met, and that they have a financial plan set forth (which I am often happy to help them set up) to not get themselves in the situation again where they will need to borrow money. Of course you also need to document the loan as you would any other, including reasonable (check with your state, but you shouldn’t be near the max anyways if you like your friends or family) late fees for missed payments on whatever payment schedule you have set forth to teach them that credit isn’t something to be taken lightly. If you want to charge interest, do so, if you do so reasonably they will often be very happy with you (I’ll give a good example in a moment), charging Prime is usually a good benchmark, it’s more than you’d make in a high yield savings account and it’s a better rate than they’d get from any creditor, so you’re helping them out. Ultimately though, along with your judgement, trust your gut when deciding whether to lend to them or not, it’s Ok to say No, even if they know you have the money, if you think they’ll pull something; just use that old line, “Sorry, never lend to friends or family.”
Next, know their financial situation and be realistic with the payback schedule and only loan to them if you can provide one reasonable to it. If they need to set up monthly payments for a year to payback a $300 loan because they’re still putting away money for an emergency fund (go back to helping them with a financial plan) and that’s a reasonable payment their disposable income will allow, do so, you’ll have a high likelihood of getting it back. And if they decide to stop making payments, don’t jump on them demanding collections, talk with them about why it’s happening and be reasonable, sometimes you may need to lower the payments and stretch them out over a longer period of time, and sometimes your loan has just become a gift (which goes back to only loaning disposable income). Money is replaceable, good friends and family are not.
However, if in a situation where they just decide not to pay you back per the terms of the contract when they are able to, don’t make threats, don’t play the drama game, just spend a couple bucks and file a small claims suit against them on day 61 (or whatever your contract stipulates). Any friend who has such an attitude isn’t a friend, and any family member needs to be taught a lesson (family should act like family, and while I’m sure some will disagree, filing against them is the lesser of these two ‘transgressions’ concerning family). Now, if you documented the loan, you’re pretty much guaranteed to get a settlement against them, the problem then with collecting on it varies by State, and perhaps you won’t even want to or care to. The fact is that you taught them a lesson. Maybe in time a friendship or the family relationship will heal, and maybe not, but that is a risk you take, fortunately my family would never do such a thing and I don’t make friends with people who wouldn’t do whatever they could to pay me back, so it would never be an issue (Thank God).
Now a good story to end this all. One day I was walking in a Best Buy with a business associate and good friend of mine (we’re both self employed and I’d actually been helping him get his finance straight and such) and there was a laptop on sale that could benefit him for business, point being it wasn’t frivolous. He says he’s going to buy it and pulls out a 24.99% interest credit card (eck, long story short, all of his credit cards are now locked in my safe). I stop him rather abrubtly, knowing his finances that he could afford to pay it over a six month period, but also knowing the APR on that card. So I offer to loan him the money at current prime (simple interest) under a six month repayment schedule, basically forcing him not to get into more irresponsible debt. I buy the laptop, we head back to my place, I type up a contract with repayment terms, we both signs, and I hand him the laptop. I even made a repayment schedule for him as well with due dates and the amount due in an easy to read spreadsheet. Needless to say every due date there was a deposit in my bank account for the amount which he owed. He paid it off, was thankful for the loan, I made more than I would of with the money sitting in a high yield savings account, and all are happy (by chance, he’s also going to be the Best Man at my wedding). Ok, end of happy bunny rabbit example. It wasn’t a “need” loan, but it wasn’t a frivolous one either and the same principles applied.
So, to sum it up, I think it’s Ok to loan to Friends and Family. Just make sure you are only loaning disposable income of yours, you get everything in writing signed by both parties, you help them make sure they’ll not need a loan like that again and make sure that they’re on a repayment schedule they can actually afford without sacrificing too much, and, of course, that you truly trust them. Chances are it’ll turn out Ok, whether or not you actually get your money back.
However, with all that said, I’d much rather give the money as a gift if the person is truly in need rather than a loan, providing they are willing to open up ‘their books’ and let me help them with their financial planning and getting on the right track. I just think it’s a better choice and you’re giving them a much more valuable gift by helping them set their finances straight, and as it’s all disposable income, you can afford it.
People often approach me to help them develop plans to pay off their debts, which I am always happy to provide (free of charge) as long as they’re completely honest with me about their finances. Often after three to six months of the changed lifestyle often needed to payoff these debts, people tend to get discouraged and start to just consider alternatives to paying them off, including bankruptcy or just stop paying all together when they could continue, don’t let yourself fall into this discouragement.
As I posted yesterday, I’m in the process of paying off all my credit cards, especially the ones that Rate Jacked me for no reason at all. Well Bank of America seems to have Rate Jacked over a million people with perfect payment histories for no reason at all. I’m proud to say that the balance is now zero and they are now forever sock drawered. I also have an emergency checking account that I keep with them that I will be closing thanks to their rate jacking decision.
While I am not overextended beyond my means, nor am I struggling to make payments beyond minimums, I can safely say that I am addicted to credit. I have a little over $60,000 in credit card debt (I’ve decided, again, the pay it off and without sacrificing anything it should be gone in a year or two, but that’s not the point). I have something like 80% utilization on my personal cards while having plenty of money in high yielding savings accounts and the stock market. I know what I should do in this situation, I’m just too apathetic to do so and would rather just plug away at it until it’s gone, while continuing to also contribute to my savings, retirement, etc.