Personal Finance

It is one of life’s most awkward moments. When a friend or relative puts you on the spot and asks, “hey can you lend us a few bucks?”

When they’re talking about $20, $50 or even $100 we probably don’t think twice. But what if they’re asking for thousands of dollars to help buy a new car, put a deposit on a house or start a new business?

Gulp. That is serious money. And what about the consequences on your relationship of saying no? It’s a very tricky situation which needs some tough questions answered before even considering the request.

. Can I afford it?

It always amuses us how easily people make assumptions on the financial status of others. You know, “they can afford it?”

The reality is no-one ever really knows. Often outward signs of financial wealth can be based on mountains of debt.

So before even contemplating the idea of lending money to a friend or relative, work out whether you can afford it in the first place. And, more importantly, whether you can afford to lose it if things go wrong. If not, then carefully weigh up whether loyalty is worth putting your own family’s financial stability in jeopardy.

Our advice is always to protect yourself and immediate family first.

. What’s the fallout if I say no?

Financial tensions can so easily destroy families and friendships. Think carefully about the consequences if the loan goes bad or you refuse to lend the money in the first place.

It is important to sit down with the borrower and sensibly go through all the reasons why the money isn’t available or, if it is, your expectations for it to be repaid and the adjustments you expect them to make in their lifestyle to ensure it happens.

Maybe think of getting another family member or friend involved to witness the transaction so there is an independent arbiter in case of a future dispute.

. Is there a chance the money won’t be repaid?

Assess the character of the applicant and whether they will stick to their promises.

Are they reliable in other areas of their life? Are they hard workers and do they have a pride in their achievements. These are all good signs.

But if they are unreliable, shopaholics who are always looking for the easy way out then they are best avoided.

. Why couldn’t they borrow from a bank?

Banks are an easy scapegoat to blame if someone has their loan application rejected. But often the bank is the only one thinking with their head rather than their heart.

Banks carefully assess every loan application by looking at the purpose and the borrower’s chances of repaying it.

With all their expertise and knowledge, if the bank doesn’t think your friend or relative is a good risk for a loan then why should you?

. Are there any alternatives?

If your friend hasn’t gone to the traditional lending institutions (like banks, credit unions and finance companies) then suggest they take this route first and come back if they get rejected.

Maybe offer to help them with the application to improve their chances or provide a reference to their good character.

Hopefully they get the money which lets you off the hook. If they don’t then use that rejection to suggest they reassess the need for the money and whether the whole project is too risky.

. Is there an alternative “non-financial” option?

Offer to sit down with the relative and help develop a family budget to see where they can cut costs or earn extra income to raise the money themselves. It’s always easier to hit someone else up for the money rather than make some sacrifices and fund it yourself.

If they accept the offer then that’s a good sign they are committed to making it work and assures you they won’t be living the high life on your money. If they don’t want help then start to worry.

Maybe offer to make an appointment with your financial planner or accountant to get independent advice.

. What is the best repayment plan?

If you decide to be the friend or relative’s banker, and fork out the money, then act like a bank.

Sit down and work out a repayment plan. Make sure everything is put in writing and, depending on the amount involved, even think about asking for security over a house, investments or other assets… just like a bank would.

If the borrower is surprised by the formalities, simply explain it shouldn’t worry them if they’re confident of living up to their promises.

HOW TO BORROW FROM A FRIEND

. be professional

. outline a repayment plan

. if it’s to start a business, give them a share

. suggest the deal be put in writing

. explain the sacrifices you’ll be making