Should You Give a Personal Loan?

Be cautious about personal loans

Sit through any afternoon of TV court cases – Judge Judy, Judge Mathis, or Judge Milian and you’ll quickly discover that a majority of their cases are about defaulted personal loans.

All of us at one time, have given personal loans that have either not been returned or been returned late or only partially.

Typically, we grant personal loans to close friends and family and that makes this article as much about tact and navigating family and personal dynamics as it is pure financial advice.

Let’s get this out of the way now – consult your personal financial adviser before you do anything that is suggested in this article.

OK, let’s begin. Collecting personal loans can be difficult because it most often a close friend, relative, or even a person we are in relationship with.

The first strategy therefore, is to figure out where your own finances are and what the consequences of default would be.

If you do not have abundant finances and default would jeopardize the basics for your wife and kids, it is better that you consider other ways to help. That’s a constructive way of saying “No”.

How Can You Help?

One way to help is to assist your borrower in locating other more formal sources of assistance. You can research banks, credit cards, lines of credit, credit unions etc. for them, options they may not have considered because they have .. you!

You are usually not the last option for loans for a frequent borrower (and non-repayer); you are just the easiest and most amicable option.

Download forms for your borrower and help them fill out the forms. Do NOT co-sign any loan forms whose you are not going to be happy being totally responsible for. This is so important that I have to repeat it: Do not cosign loans that you cannot personally pay off with great ease.

OK, the truth is that many borrowers seek out their friends because their credit is shot, sometimes due to reckless behavior on their and sometimes, just due to misfortune.

It doesn’t make it easier to decline loaning the money, but if you cannot afford it – either the loan or the cosigning – then the answer must be no. A friendship cannot trump formula for your children or paying the electricity bill.

So the second suggestion is for you to find other ways to help. If you do not have the money, offer your time on a home project. Offer to baby-sit your friend’s or relative’s kids to save them money on day care. Volunteer to give your friend an occasional ride to work instead of money you don’t have for them to buy a car.

Also, don’t venture into the realm of the ridiculous by going out and taking a personal loan in order to loan money to someone wanting to borrow from you. Don’t do it.

Concluding Thoughts

OK, let’s recap here. If you could not afford to loan the money, you can help your borrower find other sources for the loan.

Failing that, you might have thought of creative non-financial ways to help your friend. It is not that you have to do any of this, but it helps the borrower to think outside the box and look outside of you for their needs, especially if they have made it a habit.

These actions also help to convince the borrower that you do care about their financial predicament.

If none of these approaches succeed in helping your friend and you feel a need to make the loan AND can afford to do so, then work out them terms of the loan beforehand.

The terms include the loan amount, repayment amounts and schedule. Most important, have a written and signed agreement, in the unlikely event there is a dispute about the loan.

Be careful, clear-eyed and realistic. Document everything and be as generous as you can.

  • Florence

    I did help a friend build their house since I am not able to lend them any money. They were very happy because I helped them in my own little way. This article should be shared to everyone. I will start spreading the news.

  • Henry

    I have been through asking help from my friends and family. All they thought is I needed the money but I guess I never really ask for their help. I will surely share this site to them since I learned a lot from here.

  • Christopher Skyi

    Great article that hits the nail on the head: if you feel the need to borrow a lot of
    money from friends or family rather than the bank, is it because your credit is
    shot because you haven’t managed your finances well enough? If that’s the case, then going further into debt is the last thing you want to do.
    If your credit is reasonably good, however, an underappreciated but
    growing option for many people is a peer-to-peer loan. Often these loans have
    lower interest rates and less paperwork than traditional bank loans though your credit score does need to be at least reasonably good.