Should I Loan Money To A Friend?

All of us have had awkward money scenarios happen to us in our lives. There are the immediate face-to-face confrontations when a personal friend asks us for money while out on the town. Or what about the time that your college roommate asked you if they could borrow $5,000 or $10,000? Remember when your 2nd cousin said they would be starting a business and were wondering if you would invest $25,000 in the new venture? So, how do you handle a money situation that may make you lose sleep at night? Here are three smart money moves steps to diffuse the problem.

  1. Step 1: Empathize. Listen, and Show that you’ve heard by recapping what specifically the other person is wanting to do with the money. Make sure you initially understand it from their point of view. Indicate that you know that economic times are tough, and their individual circumstances are particularly difficult. In a certain sense you need to be able to step inside of their shoes to feel a little bit of their pain. If they had the money, would they really be asking you? Sometimes yes and sometimes no, but it is important to hear them out. It won’t feel so confrontational if you start with a recap of what they are asking to do with your funds.
  2. Step 2: Offer support, but be clear it won’t be financially. You can tell someone that you would be happy to have your ear bent when it comes to strategy about the new business. You can tell them you might be able to offer advice when it comes to buying a new car. You may be able to even suggest that you can strategize with them on where they can potentially find the funds. Brainstorm with them about what can be done to obtain the funds, while avoiding the temptation to jump in to do it yourself.
  3. Step 3: At the end of the day, invoke higher principles. The most important part is to stick to your principles. I have seen too many family situations and friendships go bad over money and resulting resentment. In the heat of the moment, the only thing that seems to matter is the details that are plaguing people — in this case how can they get the money they need? Thus, you need to let people know that you don’t loan money to friends, family, etc. as you haven’t found it to be a healthy principle for a good long-term relationship. While this may feel tense at the moment, grounded principle-based decisions should allow your relationship to continue the way it always has been in the past. Remember, that when people are in dire need of money, their own emotional decisions become clouded by their goal of finding the money.

When people feel understood, empowered, and guided by higher principles, tensions are generally defused and order is restored. Make you do your best to empathize, offer and provide any moral support you can, but you don’t have to be the central bank to make your relationship work.

Written by:
Ted Jenkin

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Ted Jenkin is a frequent guest columnist for the Wall Street Journal and Headline News Weekend Express.  He is the co-CEO of oXYGen Financial.  You can follow him on LinkedIn @ www.linkedin.com/in/theceoadvisor or on Twitter @tedjenkin