Episode 2: Why People Lend Money
In the first episode of this FINTEL series on how not to lose your money as a lender, I gave a comprehensive definition of money lending as it pertains to personal finance. Today, we want to look at the reasons behind money lending.
Normally, you would expect every working adult to be self-reliant and financially independent but that is not always the case.
In fact, studies show that a large percentage of middle-class households are entrapped in some large burdens of debt. Therefore, there will always be demands on you to lend money especially to friends and family members in need.
The questions many lenders fail to ask are:
- “Why am I lending this money?”
- “Am I really helping the borrower by subsidizing his financial obligation at this time?”
- “What is the guarantee that with my assistance, the borrower will learn the necessary lessons from his financial crises and make amends so he’ll never have to borrow again?”
It is accurate answers to questions like this that will help you know if your hard-earned money is going to be put to good use or if it is going to be wasted on yet another indulgence of the borrower.
When lending money, you have to remember that it is always easier to spend other people’s money than money that is self generated.
As such, without getting the right answers to the questions above, there is little or no guarantee that your money will be put to proper use. There is also an even greater chance that your debtor will default on the loan and you will lose that money.
In my just concluded WarOnDebts Masterclass, I wrote extensively on why people get into bad debt.
Some of the reasons I gave were profligate consumption lifestyle, poor mindset and negative beliefs, keeping up with the Joneses, foolish generosity, and so on. (You can get a PDF compilation of the full manual here).
If you don’t understand the main reason behind you lending your money to someone, you may be unknowingly sponsoring the bad habits and lifestyle that got the person into debt in the first place. When you do so, you are not helping the debtor.
Besides, chances are that, with that lifestyle, he may never be able to pay you back and he’ll eventually become economically dependent on you.
Loans that are not to be repaid can be known as “forgiveness loans” or more aptly put, “cash gifts”. Such gift loans are usually earmarked by the debtor for consumption or the propping up of a certain lifestyle or indulgence.
According to the authors of the book, “The Millionaire Next Door“, giving of such “cash gifts” is the single most significant factor that explains lack of productivity in people.
All too often, the recipients’ psyche is programmed to allocate such gifts for consumption instead of cash flow producing initiatives. They can be habit forming. They make it difficult for the recipient to be financially independent because he will always feel indebted to the lender.
It is for this reason that you have the right to ask to know what exactly your money will be used for, especially if you are giving for the sake of helping the borrower out of a bad fix.
Unfortunately, many lenders are either too uncomfortable or negligent to ask these questions and they usually end up regretting when the loan is lost.
There are many reasons people lend money. For the sake of clarity, I am going to highlight just three of them.
Compassion refers to sympathy for the suffering of others, often including a desire to help.
Before someone approaches you for money, the person is likely struggling financially. It is on him to present his situation in such an emotionally appealing way as to evoke your sympathy and compel you to bring out your purse.
In an earlier blog post, I wrote extensively on how emotions and money hardly go together. The moment you allow your emotions to interfere with your money making decisions, you are calling for trouble.
I wrote that it is important that you separate your emotions from your decision to lend or not to lend money. By doing so, you can be more objective and rational.
This is because “experienced borrowers” especially those who never plan to return your money, will attempt to leverage on your sympathy to prey on your finances.
Some even make up false or exaggerated stories that misrepresent their true financial need in other to win your compassion. Financial Intelligence requires that you become aware of these tricks before hand so you will not be cajoled.
When you lend money for the sake of reciprocity you are doing so mutually because you expect the borrower to be able to help you someday in return.
Many people go out of their way to lend money to a friend, even when they don’t have, because they believe they are obligated to do so in other to win the friend’s reciprocal favor.
The truth about this mentality is that if you are more financially intelligent and independent compared to your (financially unintelligent, perpetual) borrower, you may never have need for their financial help.
Even if you are afraid that the tables will somehow turn and you will be in need of their financial aid in future, giving for the sake of reciprocity is not still the right motive for lending money.
The essence of giving out a loan should be for you to get your money back as and at when due, not for the borrower to help you in return some time in future. There are no hard and fast rules that they must help you in return.
Remember what the Bible says in Luke 6:34: “And if you lend to those from whom you hope to receive, what credit is that to you? Even sinners lend to sinners, to receive as much again. (RSV)
No doubt, the borrower may decide to do you a favor to reciprocate for your financial help. But that should never be at the center of your focus for lending money. Otherwise, you may die of remorse when they fail to live up to your expectations.
This is perhaps the best motive you should adopt when lending money.
Lending generously does not necessarily mean you are giving a “forgiveness loan”, rather it means you are giving as an act of kindness – no emotions attached.
Usually, the decision to lend generously comes after analysing the borrower’s need for the loan and arriving at the logical conclusion that your money will be put to good use and that your debtor has the integrity and the capacity to pay you back as promised.
If in the end, he somehow defaults on the loan and there is no way of getting it back, it will not take a major emotional toll on you because you gave the money generously.
This lending approach is perfectly in line with the popular saying:
“Never lend what you cannot afford to give”.
In summary, next time someone approaches you for a loan, I hope you will take your time to find out your motives and the main reason you want to lend that money.
What do you do if you are not satisfied with the reasons before you? How do you know whether or not the borrower is qualified for your loan?
I will write more on this in the next episode, when not to lend money. You don’t want to miss it.
What are your thoughts on today’s episode?
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