If you’ve ever been in the position where a friend or family member has asked to borrow money, you know how difficult it can be to say no. You want to help them out because you love them … but money has a funny way of putting a strain (or even potentially destroying) strong relationships. Gifting money is one way of avoiding a potentially complicated situation, but if you don’t have any money to give, what do you do?
I’ve been in this situation before, and it’s really stressful. When I was in my early 20’s, I had a maxed out credit card and no savings, but someone I cared about needed my help. He was sick and couldn’t work when he was in and out of the hospital. He couldn’t pay for his bills, rent, or his medicine. So over the span of just under a year, I loaned him thousands of dollars out of my line of credit, with his promise that he would give every penny back to me. Ha!
There are plenty of other ways you can help somebody out financially, without handing over money. But when it’s somebody you care about, there are times where you might find yourself saying yes (like I did). Whether it’s a loan of $20 or $20,000, your ideal situation would probably involve recuperating all of the money you lent. Unfortunately, it doesn’t always work that way.
However, if you’ve weighed the pros and cons, and you still feel like loaning money is what you want to do, here are a few suggestions to help you protect yourself as best you can:
Loan or gift?
The most logical thing to do is not to loan the money – but to gift it – instead. For smaller loans, sometimes gifting the money is the easiest thing to do. You don’t have to worry about monitoring repayment schedules, what to do about late payments, or any hard feelings if the borrower can’t come through on paying you back.
If you decide that you will loan the money, you must still assume that you’re not going to be paid back. Many personal loans are never repaid, and you will be disappointed and resentful if you keep expecting money that will never be returned.
Don’t loan money you can’t afford to lose
Life can be unpredictable, especially for those who aren’t financially able to stand on their own two feet. Even the most responsible person can end up defaulting on a loan, so don’t lend any money you can’t afford to lose. This includes money from your Emergency Fund. You never know when you’ll need the money, and if it’s not there when you need it the most, not only will you feel resentment towards the borrower, but you might end up needing to borrow money yourself!
It’s also important to note that if you have any credit card or high interest consumer debt, or if you have to use credit to loan the money, you cannot afford to help out.
Get it in writing
Don’t make a verbal agreement. Make sure you put down in writing all of the fine print regarding the loan. Then have both parties sign and date it. Include the amount of the loan, interest rate (if applicable), repayment schedule, consequences for late payments, and potential collateral should the borrower end up defaulting on the loan. Try to be as specific as possible; you never know when it will come in handy down the road if something needs to be clarified.
Negotiating the nitty gritty payment details might cause some heated arguments and disagreements – after all, money is a sensitive topic. Consider bringing in a neutral third party to act as a mediator.
It can cause a lot of resentment and anger if you loan somebody money for a specific reason (like paying for tuition or the heating bill), only to see them spend it on something else instead. So if somebody has asked you for a loan for late bills, rent, or anything with a specific recipient, and you’re concerned the borrower might end up spending the money on something else, tell them you will only loan them the money if you can pay directly to where the money is owed.
Think twice about co-signing a loan
If you’ve refused a request to borrow money, and they’ve asked you to co-sign a loan for them instead, think really carefully about your decision. It might seem like a good idea, but once you’ve co-signed for a loan, you’re legally responsible for that debt. If something goes wrong and the borrower can’t – or decides not to – make payments, you’ll be stuck with the entire debt.
If you haven’t already been in the situation where you’ve been asked for money, chances are, you eventually will be. Deciding how you will handle the situation before it arises will ensure that you are less likely to be pressured into loaning money that you can’t afford, or don’t want to give. My relationship quickly deteriorated with the person I loaned money to. Once he was back on his feet, he started making small payments. However, that only lasted a few months before the payments stopped – not because he couldn’t afford them, but because he didn’t feel like making them anymore. I eventually sued him (and won) in small claims court, but to this date, I’ve recovered less than half of what he owed me. It’s something I hope to never go through again, and that’s one learning experience I’ll never forget.
I still lend money occasionally, but in much smaller amounts (usually never over $100), and I never expect to get my money back (although it’s great when I do). This leaves me with no room for resentment or anger, and our friendship stays in tact.
So if you do decide to loan money to a loved one, remember that no matter how agreeable the borrower is to your rules and terms of payments, or how enthusiastic they are about paying you back, you might not end up with the happy ending you want. Hope for the best – but make sure to plan for the worst.
Have you ever loaned money to a loved one?
According to a recent study done by a group of sociologists, young adults (aged 18-34) can actually benefit and improve their self-esteem by carrying debt. Debt has the ability to give them a feeling of “mastery” – or the idea of being in control of something. And the more debt you have, the bigger the boost you seem to get. That’s the good (?) news. The bad news is, this false sense of confidence only lasts until you’re 28 – when, as you can imagine, it starts to have the opposite effect. The study found that debt boosts self-esteem because it allows you to live large. Being able to rent the apartment all your friends are jealous of, buy nice clothing, go to those fancy restaurants, or attend that expensive University – it is all attainable to you, as long as you’re willing to sign on the dotted line and live beyond your means. Sound familiar? That’s how I lived for quite a few years.
The study goes onto talk about how young adults might “experience debt as an investment in the future,” regardless if it’s student or consumer debt. Once young adults reach the age of 28, the good feeling associated with carrying debt tends to wear off. They might start to realize that they overestimated how much money they thought they were going to earn at their jobs, and/or that paying off their debts is not as easy as they had anticipated.
But what I found most interesting about the study is how debt affects young adults is dependent on what other financial resources they have available to them. If they come from a wealthy family, they might receive no self-esteem boost whatsoever from carrying debt. However, those that come from a family in the bottom 25% of household income got the largest psychological boost from having debt. Spending beyond their means might make them feel better about themselves – but the drawback is that in doing so, they are making it much more difficult on themselves to overcome their debt (and potentially their low-income status) in the future.
I started to feel guilty about my debt when I was 24. In the 5 years previous, I had racked up $21,000 in debt. So if I hadn’t decided to do something about it, my credit card and student loan debt could have easily doubled by the time I turned 28. It’s kind of a scary thought.
Did your self-esteem improve by carrying debt and living beyond your means? At what age did you start to feel guilty about your debt?
Last week a friend and I were talking over coffee. She said that she didn’t know how I could live on a budget, or afford to do all of the things that I do – like go skiing, play team sports, travel, buy concert tickets, and even save for retirement. She said that the few times she tried budgeting, she felt deprived and irritated, so she stopped (a feeling I could absolutely relate to). I told her that the only reason I can afford to do anything is because of budgeting.
Some people are just good with their money. They know how to spend less than they make, without having to use money tracking software or a big Excel spreadsheet – but not me. I’m bad with money – always have been (which is how I got into debt in the first place). And that’s why I personally need to account for everything that I purchase, as well as every dollar that I save.
It’s difficult trying to explain budgeting to someone without getting preachy. And for someone like my friend, who has never been able to successfully put together a budget, it can be overwhelming. It was especially hard because I’m not yet comfortable talking about my struggles with money with people in my real life. I tried to explain as best I could that being on a budget does not automatically mean you have to cut out every single fun thing you’ve ever done, or will do in your lifetime. It is about taking control, understanding where your money goes, and realizing what you value in life.
When I was in debt, I spent money I didn’t have because, like her, I didn’t want to feel deprived of anything. I wanted to experience everything, and have fun. Everybody else is in debt, so why should I be any different!? Whatever I couldn’t afford, I always found a way to justify the purchase to myself, and bought it anyway. Obviously I didn’t think about the repercussions … and then one day I woke up and realized the extent of the mess I had created. I was literally spending my future away.
My friend and I ended up chatting about how we live in a society where we want everything quick and fast and now. And the reason so many people are struggling with debt is because debt repayment is slow and cumbersome, sometimes exhausting, and very difficult for most people who are used to getting everything immediately. Instant gratification, right? Not so, when trying to get out of debt. But you know what’s weird? Since I’ve started budgeting, I’ve probably cut my discretionary spending by more than half, and I felt more deprived then – when I was spending money on whatever I wanted – than now. It is absolutely amazing how fast those little purchases add up (most of them I barely remembered buying). And at the end of the month, did I really appreciate those items that I had bought? Or could I have saved that money instead, with little impact to my life.
I used to absolutely hate the feeling of being broke. And I was broke. A lot. It was a desperate, extremely stressful feeling having to count the days until my next pay cheque. I always say that the turning point for me was when I realized I didn’t even have $10 to my name in cash or credit in order to buy bus tickets – and I had to ask my (then) BF of only THREE WEEKS to borrow some cash. I’m still mortified to this day about that phone call. And it was the motivation to avoid that desperate, extremely humiliating feeling that made me want to change. Understanding that I didn’t have to ever feel like that again was what made my brain click into a completely different mindset. As soon as I realized that budgeting wasn’t about deprivation, it was about empowerment – my entire life changed.
Instead of “I can’t afford Item X,” it became, “I am choosing not to buy Item X.”
Instead of being reactive and saying: “how did I spend $458 on clothing last month?” I became proactive by saying: “I know I have $100 to spend on clothing this month.”
It was about changing my mindset from letting my money control me, to me being the one in control. I decide where my money goes, and that’s a very liberating feeling.
So to my friend, I hope you get a chance to read this. I know I probably didn’t make much sense during our talk, but this how budgeting has affected my life in the most positive way possible.