Let’s pretend were in a down economy. (Hard to imagine, I know) Now, assume that you are fortunate, despite that poor economy, to still have a secure, well-paying job. And, since you’re a frequent reader of Dough Roller, you know how to stretch your dollars as far as the eye can see. You also have a comfortable cushion of savings, at least six months worth of your personal expenses. Long story short, you’re doing very well.
Then one fateful day, you get a phone call from a friend or family member who’s in a financial bind. They’ve started a new job with no base salary; all their income is tied to sales. They expect to start generating real income once they manage a few sales, but their supervisors tell them that process could take 4-12 weeks. They ask you if you can help tie them over.
Loaning money to a friend or family member is always tricky. Without proper paperwork, recouping the money can be very difficult. (And who wants to wind up on a courtroom drama show, trying to explain to Judge Judy why on Earth anyone would loan a friend money?)
This can also ruin a friendship very quickly. Your friend may think you’re scrutinizing their every financial decision. And, you may very well find yourself doing just that, wondering why it is your friend is spending a bit of money at TGI Friday’s instead of paying you back. But, assuming your desire to help outweighs any reservations you might have about spoiling a good friendship, here are a few hints for how to make sure the financial end of your decision is sound.
- Find out why it is that your friend needs the money – If it’s because they’re out of work, ask how soon they think they’ll be employed. If your friend or family member is steadily employed but needs a large sum unexpectedly for an unforeseen expense, the risk to you is much lighter.
- Make sure you have a clear idea when you can expect the loan repaid – Having clear expectations is good for both financial planning, and for the friendship.
- Know whether they’ll pay you back in a lump sum, or in small payments – It’s another thing you need to know for sound financial planning. Knowing you’ll get the money back slowly may affect how you allocate your other funds.
Here’s one last thing to consider, if you’re on the fence. Sure, a loan can ruin a friendship and you’re putting a great deal of trust in your friend to pay you back. It’s a risky proposition on all fronts, but consider the potential rewards. If they pay you back, you’re seemingly right back off where you started,and actually a little bit ahead.
Your friend will always remember that time you helped them out, and will likely be there for you when you need a helping hand. Remember that favor is worth more to the individual receiving it than the individual providing it so pick and choose who and how you help others wisely.
Published or updated September 7, 2011.