This is something we struggle with periodically.
The conclusion we’ve arrived at is this: except under exceptionally rare circumstances we no longer make loans to friends, family or business acquaintances.
This has been a hard, and yes sometimes expensive, lesson learned.
You can imagine the situation: you’ve achieved your position of relative affluence and comfort. A family member or other acquaintance comes to you with a pressing need; perhaps a car that’s in need of emergency repair they can’t afford, perhaps a business in need of a cash infusion. Someone you care about is in a situation where you have the means to help.
Hesitate. If in doubt, don’t do it. At least not without thinking long and hard about it.
Here’s the scenario you must be prepared for: what if they miss payments? What if they don’t pay you back at all?
What recourses do you have? Even if you have the loan all properly written up and formal – are you prepared to send your friends or family members to collection if they don’t pay?
Either way you lose: if you do nothing you’ll feel that your generosity is being taken advantage of, and if you do take steps you, and your borrower, are likely to end up with hard feelings towards each other.
It’s not a pretty picture.
And even when things are going well, it can add an awkward dynamic to a relationship – in a sense as a lender you’re placed in a position of power with respect to your borrower, and even if no one every explicitly notices that, it can still color the relationship.
Like I said, I’ve been there. Repeatedly. And the conclusion I’ve arrived at is: no more.
At least not without a lot of really deep and hard soul searching.
I don’t want to give the impression that it never works. It certainly can – for example I’m carrying a mortgage contract for property we sold to friends some years ago and it’s been working just fine. As far as I can tell our relationship remains unchanged. It’s still a risk, but the formality of a real estate contract and the fact that this type of transaction is not uncommon, I think, helps make it less of a special case.
But I’ve also made business loans to friends who’ve apparently disappeared or who’ve simply failed to keep in contact. And we’ve made personal loans that have extended well beyond their initial terms.
Could I do something? Perhaps. Should I? I don’t know. Will I feel bad if I do? Probably. Will I feel taken advantage of if I don’t? Definitely.
Even though it can work sometimes, the conclusion my wife and I came to is simply to avoid it if at all possible.
One reaction is to consider giving gifts. If you know you’ll never see the money again, sometimes the right thing to do is acknowledge that up-front. But that too can also add an unwanted dynamic to the relationship depending on the situation.
Another possibility is to use the formality of a loan to make what we knew was a gift acceptable to the recipient – but that too has it’s share of issues over the long term.
And yes, I know too that even saying “no” has it’s share of problems, depending on the dynamics of the relationships involved.
The benefit of “no” is simply that you’re done. Sometimes the relationship may take a short term hit, though my experience here also is that more often than not, it doesn’t. And, also more often than not, your borrower is often forced to confront the issues they’re dealing with a little more directly on their own.
That’s frequently also a good thing.
Obviously I can’t make specific recommendations on what you should do in any particular situation – only you know what’s right for you and for the relationship involved.
But I can say this: don’t take it lightly. Think deeply about how what you might do will play out in the long run, and how it might impact the relationship with your potential borrower.
As hard as it is, sometimes it’s simply not worth the cost.