Six consequences of lending money to family and friends

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Lending Money

Six consequences of lending money to family and friends

What would you do if a loved one asked to borrow money? Would you do it at the drop of a hat, or would the answer be a resounding “no”? Or would you reluctantly agree?

Most people will be faced with this decision at some point in their lives. It is therefore essential to know how to react so you are not caught off guard when these situations arise.

It is very difficult to anticipate the consequences of lending money objectively. Emotions take over and can influence our decision.

The six possible consequences of lending money to relatives and friends

Everyone wants to help a family member or friend in times of financial need. But helping someone solve their debt problems may have a number of consequences.

  • The loan may jeopardize your relationship with the borrower if they are unable to repay the loan.
  • The loan can cause arguments with your partner if you disagree about whether or not to grant the loan.
  • Other family members or friends may expect the same treatment.
  • The loan may be perceived as favoritism by other relatives and cause resentment towards you and the borrower.
  • Lending money may validate and encourage the problematic behaviour that caused the debt problems in the first place.
  • Lending money may ultimately cause you financial difficulties.

Who borrows money and why

We say it time and time again: No one is immune to debt problems. This means anyone could ask you for a loan.

That said, the most common scenario is cases of adult children asking for a loan from their parents. In such circumstances, a good number of parents agree to lend money to their children.

Indeed, it is difficult for them to remain stoic in the face their children’s struggles. Whatever the cause of their financial problems, they feel compelled to help. Unfortunately, they expose themselves to the same risks previously mentioned.

How to say no

Refusing to give financial help to a loved one is not easy. The key is to be diplomatic in your approach, to be able to handle the situation with empathy while firmly refusing their request.

Regardless of whether the following are actually true or not, you can use these reasons to explain why you will not lend them money:

  • Explain that you do not have the financial means to help
  • Draw on bad experiences you have had in similar situations
  • Offer another form of aid
    • E.g. Buy a bus pass for someone who needs $1,000 for car repairs. This meets their transportation needs and allows them time to put aside money to pay for the repairs.
  • If possible, refer the person to your financial adviser
  • Refer the person to a Licensed Insolvency Trustee (LIT) at Ginsberg Gingras for a free analysis of their situation.

Generally, your refusal will be well received by the person asking for money. Remember that this person likely feels uncomfortable about having to ask for money. They understand that insisting will only make the situation more awkward.

Of course, there are always exceptions. Some people will readily guilt you as a means to an end.

  • “I will lose everything and end up on the street. ”
  • “I thought you were my friend. Friends help each other out. ”
  • “I promise to pay you back, with interest.”

At this point, a satisfactory resolution for both parties is virtually impossible. It is nevertheless critical to be firm about your position. If you falter at this point, the other person will think nothing of using the same strategy again in the future.

Finally, if you need to quickly put an end to the discussion, you can say that you’ll think about it. This will give you time and allow you to resume the discussion on your own terms at a time that works for you. Obviously, this only delays the problem temporarily.

Deciding to lend money

In certain circumstances, you may agree to lend money to a loved one. If this is the case, here are some rules to follow:

  • Lend only amounts that you are comfortable providing
  • Do not set expectations about repayment
  • If necessary, protect yourself by preparing a written agreement
    • Have the agreement notarized if the loan involves a large sum of money
  • Ask yourself if the loan will really help the person

Using the help of a Licensed Insolvency Trustee

In my experience, people who borrow money from relatives or friends are not living through temporary hurdles. It is often a chronic problem that cannot be resolved through a loan from you.

In most cases, these people should contact a Licensed Insolvency Trustee (LIT) at Ginsberg Gingras. After a free consultation, an LIT can present them with permanent solutions to their debt problems.

If a family member or friend asks you for money, tell them about free consultations with Ginsberg Gingras. To qualify, all they have to do is complete the form on the Online Consultation page.

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