Lend and borrow with caution

In last month’s issue, we told you how to handle friendship and money. We advised you to learn to say no to financial pressures and demands from friends and family members and to always stick to smart financial choices. However, there will be times when your friends or family members may come to you with financial needs or you may turn to them when in dire financial strains. How do you handle the issue of borrowing or lending of money among friends and relatives? Read on.

When a friend or family member asks to borrow money, your first inclination is probably to help out. But many people have learned the hard way that friendship and finances don’t always mix. You can save yourself a lot of grief by knowing in advance how you will handle these situations.

Some people wisely decide that they will never give personal loans to friends, relatives or any other person. This is a good policy, as you should never make yourself a bank to lend money to others at will. If they are asked to lend money, they will simply say: “Sorry, but its my policy never to lend money to people.” If you think this is harsh, you can follow it with something like: “But I will be happy to help in some other way, if I can.”

You can help by giving advice on where the person should go for a loan, for example, a bank or any other lending financial institution. You could also advise the person to borrow from his cooperative society or chama, if he has one.

Not all loans between family and friends end in disaster, but the potential for trouble is so great that you should think twice before lending (or borrowing) money. Ask yourself what would happen if the borrower never repaid the loan, or if you borrowed and were not able to pay back. How would it affect your finances – and your friendship? Also, remember that many people take advantage of relationships and may borrow and never make it a priority to pay back.

You are better off saying “no” rather than putting yourself in a position where you have to hound a friend or relative for money. Which would make you feel worse – the momentary pain of saying “no,” or the ongoing anguish of having the loan destroy the relationship? Despite these warnings, there will undoubtedly be times you are tempted, or forced by circumstances, to lend money. For example, when a friend or family needs to handle an emergency such as sickness or death in the family and there is no time to process a bank or work loan. When you make a decision to lend, be smart about it.

*Discuss other options. Is there any other way you could help your friend or relative other than through a loan? Sometimes people think money is the only way to deal with problems when there are actually other solutions, such as advice or connecting one to a financial institution.

*Only lend money you can afford to lose. You may never see the money again, so don’t put your own financial well being on the line just because you feel sorry for your friend. Make sure you are taken care of before you lend money and never lend when you can’t afford, no matter how much you care for your friend.

*Be clear about your expectations. Draw up a payment schedule and discuss what happens if something goes wrong. Ensure your friend has alternative means of paying if, for example, should the expected source of his finances not come through.

*Get it in writing. Don’t just hand over the money without some sort of record. Make sure your friend acknowledges the loan in writing and puts down how you have agreed it will be paid back. It is often best to pay a loan by cheque, forwarded through a clearly written letter explaining what the payment is for, instead of cash, as this leaves a permanent record. Even friends can take advantage when there is no record and deny the loan when you demand for it.

*Deal with problems right away. You may feel like a nice person by not reminding the borrower that they are past the due payment date, but you are just setting yourself up for trouble. It is your right to demand your money back. Keep the lines of communication open and don’t be shy to remind your friend of his obligation. After all, it’s your money.

*Don’t co-sign a loan. Think carefully before you help your friend by co-signing on his loan from a financial institution or another friend. As a co-signer, you are legally obligated for the debt, so if something goes wrong, you will be stuck with the payments, and a broken friendship. If you want to help, it’s usually better to lend money than to co-sign on a loan.

If you can afford it and it doesn’t seem weird, consider giving the money instead of lending it. If your friend wants to borrow Ksh10, 000 and you can afford to give it, it will be better than making it a loan. That way there is no inkiness on either side. If your friend pays you back, great, if not, you can feel good about helping them out and remember; it’s always okay to politely refuse to give or lend money.

At some point, you may be the one borrowing money from a friend or family member. You should do this only if you can’t boost your income from other sources or tap from an emergency fund, like a coop saving, a chama account, or an employer loan. When you borrow, explain exactly why you need the money, put the deal in writing and then stick to your word. You honour your friendship and show appreciation when you pay back what you owe. It’s also honourable to meet all your obligations.

Keeping your word is the most important part. That means repaying the loan as promised – or sooner, if possible. Take this as seriously as you would any other financial obligation; in fact, take it more seriously where friendship or family is concerned. You never know when you will need their help again. If you don’t pay the bank back, you will be auctioned and your credit rating damaged, but if you don’t pay back a friend, you will damage that friendship and your reputation.

Don’t make promises you can’t keep. If you say you are going to pay back an extra amount on top of the loan, do it. Use the borrowed money for the stated purpose and never tell a lie to get money from a friend or family member. If you need cash to pay school fees, then pay school fees; don’t go out and buy that expensive pair of shoes, or dine out. If your friend sees you wearing a new pair of shoes or dining out when you haven’t been making your payments, it’s not going to make him very happy. Even when you repay the money, it’s unlikely he will help you again if you lied to him.

Published in June 2012 issue