Episode 3: When Not to Lend Money
“Neither a borrower nor a lender be, for loan oft loses both itself and friend” – William Shakespeare
Last episode, I showed you how to identify the reason behind your decision to lend money and why to you should never lend what you cannot afford to give.
In reality, even after you have found out your motive behind the loan, there are other things to watch out for so as not to become a losing lender.
As you probably know by now, borrowed money is one of the leading causes of misunderstanding and conflict among family and friends. Money comes and goes, but you don’t want to lose your best friend because of borrowed money.
There are times you have to say no when you feel the borrower is not “qualified” for the loan he is asking for. If you feel uneasy about going through with the deal, just remember that it if perfectly fine to say NO. After all it is your money!
However, be honest enough to explain why you’re not going to hand over the money. A true friend or a loving family member will understand. There are some cases that you don’t even need to give an explanation.
There are many people who as a result of their terrible experiences from defaulting debtors, have vowed never to lend money to anyone. They make this principle very clear to their friends and stand strongly by it. They understand that when you lend money to friends or family members, you give them an easy way out of their financial problems, instead of helping them work through their issues like learning how to create a budget or looking for alternative means of income.
But it is not everyone that has such a courage. If you are one of them, what are the things that will let you know whether or not it is safe to lend out your money?
I highlight them below.
Do not lend money;
1. When You Barely Know the Borrower
Have you ever heard stories of how people meet a complete stranger at a conference or on a social media platform, immediately find some common grounds and within a few hours or days the stranger would come up with some pitiful story and request for an urgent loan to solve a problem?
In most cases, that is always the end of the story. The stranger would cut all means of communication, change their SIM cards, “block” the lender online and even move to another city if need be.
Yes! People can be that wicked with your own money.
That is why you have to be very careful when dealing with people you have just met whether online or physically, especially when strong emotions such as love, mutual understanding, tribe, etc. are involved.
Never lend money to strangers out of trust. Give cheerfully instead, if you have or simply say NO.
2. When You Are Under Pressure or Guilt
Many people knowingly take the risk of losing their loan because they can’t bring themselves to say NO to a borrower standing before them.
They believe they are under the obligation to show kindness or prove their love for the friend or family member by lending the money. They feel a sense of deep guilt if they attempt to refuse the loan. What they fail to understand is that most perpetual borrowers are fully aware of this tendency. Therefore they find ways to take advantage of the lender’s compassion and soft-heartedness to get what they want.
When it is time to repay, they’ll double down on their “guilt tactics” to get the lender not to ask for the money back. Eventually, the lender gives up on needing the refund.
Never allow someone to use words to put pressure on you to lend money against your will. Don’t be afraid of losing any relationship as far as the other party doesn’t have your money as they go.
Any good friend will understand and respect your reason for saying NO and your relationship will be better for it.
If on the other hand, things go down south because you chose to take charge your finances, then know that the relationship wasn’t strong enough in the first place and is not worth your time and energy.
The moment you know that it will be difficult for you to request your money back, that’s enough signal not to give.
3. When You Don’t Know What the Loan Will be Used For.
Like, I mentioned in the last episode, you have every right to know what your money will be used for. You don’t want to unknowingly fund the bad habit of a smoker or gambler.
Take the pains to verify their claims for the loan if you must.
Where you find out that they lied or misrepresented their need for the loan, that’s enough evidence that they will not be honest enough to repay the loan. Tell me, why would you lend money to such a person?
4. When There is No Fixed Repayment Deadline.
As we will get to learn in Episode 5 of this series, one the ways to hold your debtor accountable is to agree on a fixed repayment schedule and deadline.
When you both are not able to agree on a deadline or you have doubts about the borrower’s ability to meet the deadline, you have every right to deny the loan.
5. When the Money is Your Business Capital.
This is a common mistake many lenders make.
If you are an Entrepreneur whose business is doing well, expect people to come asking for money. They won’t care to know how you are skillfully managing your personal life and finance so your business can succeed. All they know is that you are successful, and hence, you must have lots of spare money laying around.
Many financially unintelligent business people fall for this trap and lend out their money even from their business capital or savings with the hopes that they’ll get it back on time for their next purchase.
What happens is, they are usually disappointed and if care is not taken they go bankrupt. Sadly, many businesses have closed down as a result of such careless loans to family and friends.
You should never loan money that you’re going to need in the future, especially for your business. Never lend money that you are going to need to survive. Tell them honestly that you have a tenuous financial situation, and can’t spare the money.
Only lend money that you could live without – money that you budgeted for lending or one that would have gone to nonessential items.
6. When the Person is a Perpetual Borrower
Once you discover that someone has an history of going around asking for loans and then defaulting on them, you should keep your money very far away from them.
Do not enable the habits of freeloaders. They’re in the situation they’re in because of the decisions they make with their money. They got themselves in the mess so let them get out of it on their own. If they need to get three jobs to put their lives in order so be it. You are not their bank.
On a closer look, you may find that the person may already be indebted to and running away from several other lenders. How do you expect him to ever pay you back in that condition?
If you choose to help out a perpetual borrower, then you should also be ready to move on with your life if/when they default on the loan.
7. When There is a Previous Unrepaid Loan
Always make it clear to your debtor right from the start that you will not lend them anymore money until they refund the outstanding loan. If they come to ask for another loan, say “no” unless you’re really willing to give up more money.
If you do say “no,” simply point out that you previously told them that you would not loan them more money until the earlier loan was paid back. This is an easy and very clear response, as it puts the onus of trust onto them, not onto you.
Under no circumstances should you loan any additional money until the entire amount of the initial loan is paid off, period. You do not want to become a well of support or a means for them to get by. You are not a method by which they don’t have to start taking responsibility for their actions.
In conclusion, it pays to put your friends or family members in a position that improves their financial situation as well as their understanding of money management in order to truly help them. You are not going to help anyone by continually giving them fish instead of teaching them how to fish.
A loan is just that – a single shot of money intended to help them right their ship again. Don’t become the go-to lender in your circle of family and friends. You should never be in a state of constant lending.
Else, you will be robbed dry by people who believe they are somehow entitled to your hard-earned money.
What if you finally determine to that your borrower is worthy of your money? How do you protect yourself?
In the next episode, we will consider the questions to ask before lending out money.
Did any of the points I raised above resonate with you? Have you ever lent money to someone and regretted it? Kindly share your experience in the comments below.