Most of us have done it.
Don’t deny it.
I can see the scowl on your face when I ask the question.
How did lending money work out for you?
I understand the grimace.
You’ve paid the price.
Lost money, lost friends, bad blood between family members.
What steps can you take to prevent falling into what I call the “kindness trap.”
Most likely, you don’t enjoy lending money to anyone. Admit it.
You do it because you care.
Deep down you know there’s a great chance the experience ends badly. But you’re willing to take the risk because you’re in DENIAL.
When you know the odds are close to 100% that lending money to friends and family is dangerous to your wealth. And you’ll never SEE IT AGAIN.
Here are steps to do it wisely (or not at all).
1). Just say no – There’s nothing wrong with saying it: I do not lend money to friends or family. Explain how you value the relationship too much to jeopardize it.
2). Consider it a gift right out of the gate. To keep the peace, I always think of loaned money as gifted money. It prevents hard feelings for people I care about.
3). Know your limits. Set a dollar threshold for lending. For example, establish a maximum. A client of mine has a steadfast rule: I will only lend up to $300. No more. So if I don’t get paid back, my finances won’t take a big hit.
4). Make it official. There should be a written agreement (term of loan, interest rate). Every month the IRS publishes an Index of Applicable Federal Rates that you can use to set your interest rate for the loan. Ask your borrower to disclose his or her credit score. No. Demand it.
5). Multiple loans are a no-no. Don’t make it a habit of lending money. Never have more than one outstanding loan in existence at once. And be selective. You don’t want to make lending money a habit.
And after lenders are stiffed once, they’re most like to treat their loans as expensive lessons they dare not repeat.
Neither should you.
Never forget what you paid in blood, in cash to learn it.