Loans to Family & Friends – Don’t Do It

Have you ever borrowed or lent more than $500 to a friend or family member? If so, you’re not alone, as more than two-thirds of Canadians have done so, according to a recent survey by Investors Group.

But did we always want to do it? About a third of us felt pressured to make the loan and ironically, half of us who felt pressured never got paid back! With the current state of the economy and tighter credit requirements, loans from family and friends are likely to become more prevalent in the coming year. Is that a good idea, or a financial trap for someone lending the money?

In the It’s Your Money book there is a section on family loans. Simply put: Don’t do it. Yes, there’s pressure and some sense of obligation to help, but it is seldom a good idea. If someone is asking to borrow the money from you, it is reasonable to assume they cannot get the money from a financial institution. If that’s true, that makes them a large credit risk. So should you be the one to take that risk? Is it even fair for the family member or friend to ask you in the first place?

Yes, it puts you in an awkward position, and it may be hard to say no, but do it anyway. I can assure you that there is a very good chance you will not get paid back, or will not get paid back as promised, when promised. Family dinners will never be the same when someone owes you money and has not repaid you. It will cause more problems than the loan attempts to solve, and the person will likely avoid you, and you will get probably get resentful at some point in time.

If you have a hard time saying no, use me: Tell the person your financial counselor won’t let you make personal loans. But you do know they can get a low-interest 11% credit card that would work or an overdraft on their chequing account from their bank. Or alternative four is to give them the name of your loans officer to see.

I guarantee you that whatever the reason for the loan, you are probably enabling someone way more than helping them. But I do know many people will make the loan anyway. It’s not that I’m now going to argue in favour of it, but if you do:
Make sure you have it in writing. According to the Investors Survey, 83% of people don’t and you should. There is a short promissory note you can use in the back of the It’s Your Money book.

If it is a small amount, get a post dated cheque for the date you will be paid back. It will put the pressure on the other person to make good on the cheque. The alternative is that you will keep waiting for the payment and the other person may never get around to you. When you have a cheque, you can always hold it for an extra week or so, but you have something in your hand.

Take the attitude, either out loud, or in your head, that this is a gift. That makes the amount only what you can afford and you will never ever be disappointed. If you cannot afford to give the money away – don’t do it.

On the other hand, a family gift-loan is still a better alternative than the financial straight jacket you would put yourself in should you cosign a loan, instead.

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