Has a friend or family member asked for money this year? If it hasn't happened yet, it probably will soon enough.
In every family there’s always someone who’s constantly asking for money, some 60% of the public says, according to Jeanne Fleming and Leonard Schwarz, authors of Isn’t It Their Turn to Pick Up the Check? Now given the recession, with banks offering fewer loans, unemployment rising and foreclosures up, more folks are likely to be asking for financial assistance. In fact, Virgin Money USA, which administers loans among friends and family members, says the dollar value of loans outstanding has soared to $390 million. That's nearly double from October 2007, when the company launched.
If you run into money requests from friends and family, here are some ways to deal without sacrificing the relationship. (And some ideas for how to properly ask for money if you’re in need.)
When someone asks you for a loan:
Be open-minded, but practical. When a relative asks for money, your answer shouldn’t immediately be no, especially if this person has lent you money in the past. Consider a few things, including the closeness of your relationship, how likely it is you’d get the money back and why this person needs money in the first place. Is it to help pay their mortgage? Or to buy a new cell phone (when he already has two)? Knowing how your money will be spent is important.
Be OK with never seeing the money returned. It’s never a good idea to lend money that you can’t afford to live without. Fleming and Schwarz’s research shows that 43% of the largest loans people make in their lives are not repaid in full and with 27% of them, the lender gets nada. Before lending anyone money, think about whether you can realistically and emotionally afford to make the loan a gift.
For big loans, get a contract. For amounts that exceed, say, $500, or an amount that you absolutely, unequivocally need to get back in the near future, have a contract that lists the borrower and lender’s information including names, addresses, social security numbers, etc. Then describe the loan agreement: The dollar amount of the loan, the repayment schedule and any interest you may want to charge.
Take the emotion out of it. Both parties should realize that even for the closest of relatives, money can make things uncomfortable. Some involve a third party, maybe a lawyer you pay by the hour to draft the contract and who can set up the repayment process. You can also go online and look for third parties. At one such service, Virgin Money, you pay anywhere from $100 to $200 to set up an agreement. The site coordinates the loan terms and the repayment process. You’re paying for the paperwork and for peace of mind.
It is OK to say no, but present alternatives. It’s hard to say no, but remember that the conversation doesn’t need to abruptly end at N-O. There are alternatives to cash. Direct them to peer-to-peer lending sites like LendingClub.com where you can apply for an individual loan in the public marketplace.
Or perhaps you know a lawyer who can help them acquire a loan from a local bank, or maybe go with them to apply for a loan. If your friend or family member gets rejected, don’t stop there. Make a plan to visit at least three banks and credit unions.
Another alternative to giving money is to offer your help in the form of time and services. If your cousin or best friend needs $500 to make ends meet this month, offer to cook dinners, drive her to work, or watch her kids for free. If she needs a new suit for an interview, let her shop in your closet. There are numerous ways to help without actually writing a check.
Just because you have money doesn’t mean you should lend it out. Friends and family sometimes assume that because you are a lawyer, doctor or business owner (notice I didn’t say banker), that you have a fat piggy bank and should have no qualms lending money. That may be true. On the other hand, you may not be comfortable giving a loan right now. That should be OK. There are no sacred cows in this recession. Whether you are living paycheck to paycheck, make six figures or even millions, everyone’s been affected by this market. If you don’t feel comfortable lending money right now, you’re not a bad person. Be open and honest.
Beware of moochers. If you’ve become your friend or relative’s ATM, take control of the situation now. It may seem out of the blue when you put your foot down after giving in so often, but times have changed dramatically. If you do decide to keep lending, make it formal. Draft a contract and stick to it.
Finally, here’s some advice for when you ask someone for a loan:
Always take your loan request seriously. If you’re the one asking a friend or cousin or grandmother for a loan, treat it like you are applying for a loan from a bank. Be serious. The lender will want to know whether you’ve exhausted other resources, so make sure you can show that you’ve done everything in your power to try to shore up cash, that you’ve trimmed your budget, that you’ve sought alternatives. Be prepared to explain how you’ll pay this person back. Maybe you’ll offer up some collateral, something extremely valuable that you can trade with this person until you pay them back in full. Maybe offer to pay interest. And remember, you might hear a rejection. So don’t put all your eggs in one basket, and consider other people with whom you might be able to strike a deal.
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