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?
Breaking up with your significant other is a painful process, and most people want to get it over with as soon as possible – even if it means avoiding important discussions about possessions, finances, and joint assets.
But leaving issues unresolved can be a costly mistake – both financially and emotionally, and you might not truly realize the impact until several years down the road. This is especially true if you live together. I know first-hand how hard it can be! But I’ve learned from each experience, and I know to be a lot more cautious in the future.
Even though it sucks to think about the possibility of your relationship falling apart, but it happens sometimes. And in order for each of you to protect your finances during a break-up, you both need to put your differences aside and have a mature discussion.
Here are a few ways you can protect yourself and your finances:
Make a list of joint assets and liabilities
You will need to make copies of any joint bank account statements, Registered Retirement Savings Plan (RRSP) accounts, Tax-Free Savings Accounts (TFSA), and any investments. Don’t forget to include past tax returns, credit card statements, insurance and extended health policies, as well as mortgage payers or rental agreements.
If you have joint savings accounts or assets, talk about how you plan on splitting the money. Then, close the joint accounts as soon as possible. If you don’t already have one, open up a new account in your own name.
If you have joint debt, or if one partner owes the other partner money, you need to start talking about it immediately. Come up with a realistic payment schedule that both of you can agree upon, and don’t forget about any interest or banking fees that might accumulate as a result of holding the debt. The last thing you want to do is have to take (or be taken) to small claims court, garnish wages, fill out the endless amounts of paperwork – it’s a nightmare. I’ve been down that road, and trust me, it’s not fun.
Cancel joint credit cards and keep paying your bills
Make sure all joint loans and credit cards are canceled, and that you have a credit card in your own name only. Regardless of who owes what on your joint accounts, you are both responsible for paying it off. Interest charges can add up fast, so make sure you are both on the same page when it comes to creating a plan to get rid of your joint liabilities as quickly as possible.
Don’t forget to check your Equifax and Transunion credit reports a few months after breaking up to make sure that all of the information the credit bureaus have on you is accurate and up-to-date.
Have cash easily accessible
If you have been able to funnel cash into a savings account or emergency fund over the years, keep it where you can easily access it. You might need it for various expenses such as moving, rental deposits, furniture, and other miscellaneous costs.
If you don’t have cash available to you, consider opening up a low interest line of credit with your bank. It is not ideal, but it’s better than using a credit card, and it could help you out in an emergency situation.
Don’t make any huge financial decisions
Take your time and try not to rush into huge investment decisions or making big purchases right away. Chances are you aren’t thinking with a clear head, and if you don’t have a plan of action, you could end up making a costly mistake.
You need to make logical decisions that will help you reach your financial goals. If you’re unsure of how to handle money, get advice from an expert before going to friends or relatives.
Update your extended benefits, insurance policies and will
If your partner was listed as a dependent and/or beneficiary through your extended health benefits and insurance policies, you should update that information immediately. Contact your HR department as well as your benefits provider to advise them of the changes.
If your partner was listed as your emergency contact, make sure to go through your records and change that information as soon as you can.
Unfortunately, not all relationships last forever. This is especially true for 20-somethings who are still trying to figure out what they want from life. Make sure you’re talking openly about money and goals with your partner, and remember that it’s so important to always keep a sense of financial independence!
What tips do you have for protecting yourself during a break-up?
Whether it’s planning a vacation, moving in with someone, or simply deciding what to eat for dinner, almost every decision we make in our lives involves money in some way. And how you and your partner communicate about these daily decisions will dictate the strength of your relationship together.
Let’s face it, sitting down and having the “money talk” with your significant other for the first time can be a difficult task – which is probably why the subject is often overlooked by couples until its too late. Because unfortunately, it’s usually a financial crisis that forces couples to finally deal with their finances. And if you are faced a crisis, instead of having a calm discussion about goals and your future together, you will most likely be stressed out, with no financial plan to get you back on your feet.
Here are a few things to consider when you decide to have the money talk with your significant other:
When to bring up money in a relationship
Talking about money will never be the most romantic thing to do in the world, but consider that a recent TD Canada Trust poll revealed that 72% of people would not marry someone who was bad at managing their finances, or if they held excessive debt. The poll, which surveyed British Columbian adults currently, or recently in a committed relationship, found that nearly 40% wouldn’t even date someone who didn’t have their finances under control.
A similar ING Direct survey found that 92% of Canadians believe it’s important to date someone with a similar outlook on money, but only 50% of Canadians said they knew everything about their partner’s finances.
So while you don’t need to bring it up on your third date, you shouldn’t wait until you decide to get married to start talking about money either – because by then, it could be too late. You might be compatible in many ways, but if you’re not on the same page financially, it could lead to a relationship disaster. Starting to discuss big picture personal finance goals should happen as soon as you’re in a serious relationship and you start to see a future together.
Luckily, Nic knew I was a personal finance blogger right from the beginning, so there was no need to tiptoe around the subject of money. While he will never be as detailed or obsessed with money management as I am (not that I’d ever want him to!), he does have the basics down – like spend less than you make, and not carrying a balance on a credit card. And most of the time, he’s even more frugal than me!
Observe their spending habits
You can tell a lot about a person by how they manage their day-to-day finances. Do they dine out a lot? Are they constantly complaining about being broke? Do they know how much money is in their bank account? Do they not care about the price of the things that they buy?
You might love your partner, but if he’s a spender, and you’re a saver, will you be able to come to a compromise? Openly discussing money with your partner is the best way to prevent future arguments. Talk about your spending and savings habits, and what your financial goals are for the future.
I’ve been both the spender and the saver in relationships before, and it can be tough when you and your partner have opposing views on money. It’s frustrating! And it always leads to arguments. But now that I’ve turned my finances around from the disaster it once was, I know that there’s no way I could ever be in a relationship with someone who is bad with money. I need my goals, and hopes and dreams to align with theirs, and if they don’t care about saving for retirement (or saving in general, and living a debt-free life), I can’t stand still and wait for them.
Be honest about your debt and past mistakes
When you enter into a new relationship with someone, chances are you will have to deal with debt at some point. You or your partner may have student loans, a line of credit, maxed out credit cards, or even a mortgage. If you are planning a future together, you both need to disclose exactly what kind of debt obligation you have, because that can greatly impact your household budget, as well as your future financial goals.
Consider your personal finance goals
You will most likely never have every personal finance goal in common with your partner, but it’s important to find some common ground and go from there. Take the time to talk to each other and consider your short-term goals – like saving to buy a flat-screen TV, or that trip to Hawaii, as well as your long-term goals – like buying a home together, paying off your student loans, and what kind of retirement lifestyle you want to have.
Be honest with yourself; if you don’t see your goals lining up with theirs, it’s important to be voice your concerns now – rather than 10 years down the road.