This week, we thought we would look at an issue that some of us are likely to face, as the impact of Coronavirus affects people we know and love. That issue is what to do if someone asks us for a financial loan. It might be family, or it might be a friend. Either way, lending money to friends and family can be a touchy subject. We hope these general thoughts may help.

Before we start, can we point out that we are really talking about small, informal, loans here. We are not talking about larger loans that are sometimes made between people who know each other, where the loan is made on essentially commercial terms (for example, interest is payable according to a set schedule) and the loan is supported by things like mortgages or caveats. These loans tend to be looked at purely as investments and the fact that the parties are related is not really that relevant.

We are talking here about those ‘loans’ that get our attention because we really want to help the person asking for the money. These loans tend to be smaller and we make them to family or friends on terms that are rarely commercial. These are loans where our emotions can play a part – and that is what can make them so darn tricky. The main point is that emotions should only play one part in any financial decision; you need to use your head as well as your heart. Here are some tips for things you might consider when a friend or family member asks for a loan.

The first thing to consider is whether you yourself can actually afford to help. There is an old saying that ‘we cannot give what we have not got.’ (It sounds a bit funkier in latin: Nemo dat quod non habe). As much as you might want to help your loved one out, if you are going to need the money yourself then it is a mistake to let another person have it, albeit temporarily.

Related to this, it might be worth making a rule for yourself: only lend money to family or friends if you can afford to not get that money back. That is not to say that, because you have lent the money to a friend or family member, you should assume that the money is gone forever. But things can go wrong and the best way to make sure you are not lending money that you might need yourself is to imagine what life would be like for you if the money does not come back.

Assuming non-repayment makes sense for both social and practical reasons. On the social side, especially if you are lending money to someone with whom you want or must have a relationship for the rest of your life (which might be more a family member than a friend), it can be helpful to think about what that relationship would be like if you are not repaid. Would the relationship be negatively affected? And, if so, what would your life be like if that happened? If the consequences of not getting your money back would be hard to take, perhaps you should not make the loan in the first place.

On the practical side, most ‘friend or family’ loans tend to be unsecured. This means that, if your friend or family member goes broke, you will be at or near the end of the line in terms of who gets repaid. Once again, asking yourself whether you could afford this to happen makes very good sense.

If you do go ahead with the loan, it makes good sense to have a defined timetable for having the money repaid. Before you proceed, make sure that you both know when and how the money will be repaid. Will it be all at once or will it be repaid in instalments? Will it be repaid at a definite time (for example, on November 1), or will it be repaid when an uncertain event happens (for example, the borrower gets a job or sells their home, etc)?

If dates are established, then it makes sense to confirm how you will communicate on that date. For example, you might agree something like: “the money will be repaid on November 1. I (the lender) will contact you on October 15 to arrange how we will do that.” This allows the lender to not appear or feel like they are chasing the money. When October 15 comes, they can simply call the borrower and say something like “I was just checking my calendar and I see we agreed that I would call you today about that loan.”

This is perhaps the key point in making a loan to a friend or family member. If the loan cannot be repaid as expected, both the borrower and the lender can feel really awkward. This awkwardness can prevent people properly solving the problems with repaying the loan, which can then lead to longer-term problems. So, setting a date and a process for the loan to be repaid makes really good sense.

Extending that idea, it really is a MUST that the loan be recorded in writing. This might be something as simple as an email exchange or even a text message exchange. But make sure it is an exchange that shows that both parties were in agreement. This helps avoid confusion.

When a loved one asks for a loan, many people can ‘leap in’ too quickly to help. So, it can make sense to stop and ask yourself: are there are other ways that you can help without lending money yourself? It might be that your loved one is eligible for Government support, for example, that they simply do not know about. Or it might be that they are not thinking laterally enough about their financial problem. If debts are really racking up for them and bankruptcy might be a risk, then getting some formal financial counselling will almost certainly be a good idea (and it might not make much sense to lend money to someone who is going to go broke anyway). The thing to remember is that there is more than one way to solve a problem. When you see a loved one in need, your first instinct might be to solve the problem for them. But taking some time to consider alternatives often makes more sense and leads to better outcomes.

Finally, remind yourself that it is OK to say no if that is what you want or need to say. Hopefully, your relationship is robust enough that it will not be broken if you can’t help out. If the relationship is not robust enough, then think about whether you need that relationship. Some relationships are of course not optional (we can choose our friends, but we can’t choose our family), and those relationships can be especially challenging when money enters into them. But if the relationship is one in which you do not really feel free to do what you want or need to do, it might be time to think about that relationship.

If you are finding it hard to say no, or even if you are not sure what to do, talk to someone. It might be another friend or it might be some ‘uninvolved’ person, like us. The important thing is to give yourself time to think. After all the decisions we make with our head are just as important as the ones we make with our heart.