Lending Money - Harry Adel

Lending is one of the those great financial lessons that we’re never taught and we all have to figure it out via the hard way later in life so I thought to write a reminder to myself and to also share some of my experience.

Never Lend money

Lending money is not a position you’d want to be in. You put yourself in a liability where you’re unsure whether you will recieve your money back, jeopardize your relationship with friends and family So best way to ensure you your money and relationships safe? Is that it never leaves your pocket in the first place!

Keep a low profile

You never want to be known as the guy to go if you’ve financial troubles in your circle of friends. Because it’d be hard for most people to say no to their friends and loved ones so it’s always better to not put yourself in this situation in first place. And even if you can say no, you want to avoid creating resentment by constantly rejecting others.

Refuse

Plain and simple. You’ve no obligation to help others. I know this sounds redundant but I felt it’s important to let others know of this as some get caught up in the emotional game of how others will precieve this. Never allow guilt to drive your decision-making process. If, out of a sense of obligation, you’re inclined to lend money to someone when it doesn’t make sense for you financially, it’s worth taking a step back to consider other ways in which you might be able to help them. For example, you may be able to point them in the direction of other resources that could offer financial relief, apart from a loan.

Ask yourself Is this a life or death situation?

If it’s not then it’s ok to say no and there’re others who’re in need of such money and it’s a life or death situation for them. Ever heard of child cancer hospitals? They will happily accept any donations!

There is no charity — only investment.

Viewing lending as an investment has multiple benefits. First, it helps you to asses the situation objectively and who truly deserves help. Your friend who works as an Uber had an accident and now not only he has medical bills to pay but he can no longer earn a living due to his car being a wreck. Another friend shows up and in need for money because his car broke down and he has to ride public transport for 2 hours a day to go to his work. Now, both are financially responsible yet can you tell which one needs more help? When you lend money try to think of it as a way to help the borrower to earn more money or stop borrowing in the first place. So, I’m all for helping people who need a little push to get back to work.

Another thing, is that most people loan money when in reality it is charity. And then they expect something in return. That’s where the resentment comes in. Just because you lend someone money, doesn’t mean you own him or you must get some sort of favor back.

Ask for a detailed explanation of how the money would be spent

It’s important to know the reason as you may find other ways to help or discern if this is truly a situation worth helping. Regardless of whether the loan is large or small, you have a right to know how it will be used. If the reason doesn’t sit well with you (for a vacation, rather than a mortgage payment), kindly point your prospective debtor to the nearest bank. Though don’t be a dick about it and start judging others if you don’t agree with their reasons, tell them you won’t be able to help and move on. Don’t start preaching them about your beliefs or way of living.

Find other ways to help

This can be a great opportunity to help without involving money. Also, this is one of the best ways to tell if someone is truly honest about his need for money. A friend asks you for some money to repair his car so instead you offer to refer him to a mechanic buddy of yours who’d take a lot less than others. If he rejects such offer then his intentions weren’t as honest. Be creative and always try to go for harder solutions that don’t involve money.

Consider gifting the money instead of loaning it.

Again, you never want to be in this position (being a lender), so to avoid it how about gifting the money instead? if it’s too large you might consider gifiting part of it instead of the whole amount. It’s a really smooth exit that makes you look good as you’ve helped as much as you could without waiting for anything in return. But to be releasitc this would only work with small requests not people asking for life changing amounts.

Assume it’s not going to be paid

I’d say in some cases not only assume but be certain of this. If you’re truly okay with this fact move onward with the rest. Whatever amount you agree to lend shouldn’t affect your bottom line or put you in debt either. You shouldn’t go around helping others when you’re the one in need of help.

Credit Score System

Ok, so let’s assume all else fails and you find yourself willing/considering lending the person money. How to do it? I’ve come up with this system where basically you assess whether someone is truly fit to take a loan much like banks do. It’s basically a series of questions and it’s pretty simple to graps.

How long have you known this person for? The lesser the time, the worse it’s. Because if someone who hasn’t known you for a while comes up to you to ask for money, then most likely he sees nothing but a bag of cash or wallet ready to be snatched. He’s probably heard that you’ve money and are ok with giving it to others so why not grab some for himself. This is a really important note to take care of.
Has this person asked me for money in the past?
If so, was I paid back?
Was I paid back promptly?
What is the likelihood that I will be paid back this time? This is a common pitfall that I’ve fell into before, just because someone paid you before doesn’t mean he’ll be able to do it on time again. Situations can vary greatly.
What are the funds to be used for?
Consult a friend who knows the borrower. Highly important! The borrower might have already borrowed from other people in your circle and trying to fix things up by borrowing even more. Or he might be irresponsible with money. You can never know. So, I recommend not just asking one friend but a couple who know the borrower deeply and can offer advice.
Does this person have good financial habits?
Does he have a habit of irresponsible spending?
What’s the Borrower’s Current Financial Situation? Although this is often overlooked, you have a responsibility to yourself and the other party to make sure that the borrower is in a decent financial situation before loaning money. It can be uncomfortable, but remember that the borrower came to you for money, not the other way around.
Is there some sort of collateral equivalent? Consider asking the person to whom you’re lending money for some type of collateral equivalent to the loan amount that you can hold as security until the loan is repaid. I honestly don’t like this part but I thought to share in case.

Think you’re done? It’s only the beginning.

Discuss what shall be done if things go south

The loan terms
What you will do to avoid potential relationship issues
What each of your expectations and obligations are
How you will handle any problems that arise
The risks associated with lending money to loved ones
Is there a friend/authority whom you can resort to?

Getting It in Writing (MUST)

When making a loan to friends or family, having a paper trail can help you avoid misunderstandings. Drawing up a loan contract that you and the borrower agree to and sign makes it clear what your responsibilities are, and it gives you grounds for legal recourse if you end up needing to sue them later to get your money back.

Your name and the borrower’s name
The date the loan was granted
The amount of money being lent
Minimum monthly payment
Payment due date
Interest rate, if you’re charging interest
Consequences for defaulting on the loan

Repayment Schedule

This should outline the size and date of each payment. It should also state what happens in the case of a missed payment. You may choose not to have any penalties for late payments, but that can result in the loan payments taking the lowest priority in the monthly budget — and possibly being bumped in favor of less-than-necessary expenses like a night out on the town.

Conditions of the Loan

Clear conditions need to be written up in the case of the death of either the lender or debtor. With family members, this is especially important because of the dispersion of the estate. If one child has received a $10,000 loan, and the estate pays $30,000 to each child regardless, then you’ve just turned your wake into a family feud. You may want to add additional conditions according to the situation. For example, if you’re lending to help someone buy a home, you can secure the loan to the property.

Don’t Charge Interest

Some people see lending as an opportunity to make money and even if the borrower is ok with it, I still think it’s a dick move. Taking advantage of people when they’re in need is scummy. You’re merely helping out. If you want interest on your money, then you open up a back or not lend in the first place and see other ways to invest your money.

You still won’t get your money back

Even with all the precautions taken and following every step down to the tee, you can never be sure if you’d get your money back And that’s why it’s never a good idea to lend money.