and rewards of loans between friends
Pat Curry Bankrate.com||
had been a bad week for Bonnie Russell.
First, she went out to dinner with her boyfriend,
who told her he was having problems with his daughter and didn't have time for
Then, within days, the Web company owner discovered
that she had been "ripped off by a Web guy." She needed $3,000 to pay
another Web guy to fix her site, 1st-pick.com. There was no time to go through
a bank. She called her ex to see if he would loan it to her.
said, 'You want to be friends, here's your chance to prove it,'" she says.
"I got the money."
She got it, she says, in part
because she insisted that the terms be set down in writing, that it be paid back
quickly, and be paid with interest. The agreement said she had six months -- she
paid it back in three, she says.
"He did say to me, 'I've
never loaned money out and had anyone pay it back,'" recalls Russell, who
lives in Del Mar, Calif. "I said, 'You've never loaned money to me.'"
But Russell has been on both the lending and receiving end of personal loans and
she admits they're fraught with problems. "If you want to lose a friend,
loan them money," she says.
Credit counselors and financial advisers have pretty much the
same story to tell.
"The first byword is that
lending to family and friends on a handshake is probably one of the most speculative
investments you'll ever make," says Catherine Williams, president of Consumer
Credit Counseling of Greater Chicago.
"If you respond to someone for money, you're asking
for trouble if you expect that money back," says Dr. Tahira Hira, founder
of Iowa State University's Family Financial Counseling Clinic and founding president
of the Association for Financial Counseling and Planning Education. "If you
think you want this money back, and you expect the money to be returned, when
it doesn't come by that time, it's the start of a deterioration.
you write it off emotionally in your own mind, then that's a different situation.
If the money comes back on time, which will be a miracle, or if it comes back
later, you'll be happy."
Should you loan a friend or
family member money? It all depends. Virtually anyone can find themselves in a
situation in which they need a helping hand. Any number of situations -- a job
layoff, an extended illness, a divorce, or an unexpected expense like a major
car repair -- can lead to a situation in which a friend or family member needs
Williams and Hira both noted that lenders need to
be prepared to deal with borrower behavior that might tax the relationship while
the loan is being repaid. It may be an attitude that rubs you the wrong way, or
a purchase made when you're still owed money that the borrower has told you he
can't pay back right now.
"Let's say Susie and Bob show
up to the family picnic," Williams says. "He's got a new Coleman stove,
he owes you money, and you're doing the slow burn."
"It's a very legitimate and more-used source than
we realize," says Hira, "but it should be used to meet a shortfall,
not to take the place of someone's responsibility. Before you include a check
with your hand of friendship, think long and hard about whether you can afford
If you are asking for a loan of more than $100,
you need to know the answers to at least three key questions:
|Three key questions: |
do you need the money?|
do you expect to pay this back?|
are you doing so this doesn't happen again? |