Shakespeare’s Polonius offers the sage advice to his son Laertes in Hamlet; “Neither a borrower nor a lender be, for loan oft loses both itself and friend“.
Consider this scenario: A friend calls you and needs to see you urgently. It can’t be discussed on the telephone; she must visit you personally. You oblige and she explains that she has run into serious financial difficulty and requires a sum of N50,000 immediately to assist with her rent. She is expecting some money that she is being owed and promises to pay you back within two months.
You are touched by the sorry tale and oblige. She blesses you and visits your home early the next morning to collect the cash. Then, you don’t hear from her for several months. You call and she doesn’t answer her phone, or respond to text messages and she totally disregards your e-mails.
After many months, you see your “friend”. When you ask her why she hadn’t returned your calls, she says, “Oh, you know the network has been so bad, I kept trying your number and then I lost my phone and all my numbers”. We all know that such excuses hold no water; your friend is just avoiding you like the plague, because you lent her money! She has bought a new car, whilst yours is long overdue for a change; friend has gone on holiday to Dubai, and had the party everyone is talking about. Another year passes and you’ve seen her several times at social occasions and the debt has never again been mentioned. Sound familiar?
No matter how much you lend to friends or relatives, whether it is N500 or N500,000, it is reasonable to expect to be repaid. You lend the money because you trust the person to keep their word. Money “palaver” breaks up or at the minimum can strain relationships. Sometimes, trying to collect it can breed awkwardness, resentment, guilt, and anger. It isn’t that lending money is the problem per se; it is that money changes the nature of personal relationships. However, a loan to a friend does not always have to result in the loss of both the friendship and the money if a few issues are considered.
It is nice to be able to help out a friend or loved one faced with a health crisis or other medical emergency, death of a family member, a job layoff, divorce, a new business venture or to assist with their rent or children’s school fees. You should know what the money is needed for. If it is a sudden illness or calamity or other serious need, then you should probably consider. After all, that’s what friends are for. Think twice before supporting an indulgence.
Can you afford to lend it in the first place?
Do you realise you are likely to get back only the principal with no interest? If your friend ran into difficulty and couldn’t pay you back, will this put you in financial difficulty? Unexpected events occur that could mean that you need money in a hurry. Can your own emergency fund accommodate your unexpected need as well as your friend’s crisis?
Is it a loan or an investment?
If your friend is starting a new business, is this money an investment in the business and buying you shares in the business or do you expect to get your money back in full? Are you comfortable with the risk and is there formal documentation in place?
How much should you lend?
You must decide what you consider to be a substantial sum. Remember most experienced borrowers approach several people at the same time and can end up raising a tidy sum. Don’t play Father Christmas. You don’t have to put up the entire amount; a percentage would help.
Don’t be too casual about lending money
Even though it can be embarrassing, it’s always best to agree a repayment plan in advance. Smaller amounts can be lent without any documentation but for larger amounts, a promissory should include details such as the name of the lender and borrower, the loan amount, date, interest rate if applicable, schedule of repayment and both signatures. For substantial amounts, you may want to consider legal advice.
Once you agree to loan the money, try not to make your friend feel obliged to you, as this can put a strain on the relationship. It is no longer up to you how it is spent. Don’t change the way you treat the recipient, don’t expect special favours from them or change your personal expectations of them. Be discreet; the last thing your friend wants is for you to publicize the fact that you lent them money.
Should you charge interest on a loan to a friend?
It depends on the amount of the loan. If the loan is for a significant sum, you may wish to charge interest at least equal to the applicable Federal Govt Treasury Bill rate, which will vary according to the length of the loan. You are not trying to exploit a friend, but this can serve as a guide. However, today’s rate that may make your friend run!
Is there a repayment proposal?
It is only decent for an initial request to come with a repayment proposal. If a borrower doesn’t mention how they intend to pay you back, that should raise a red flag. What’s their track record like? Are they constantly borrowing? Don’t get caught out by a notorious borrower.
Don’t feel guilty
If you cannot afford to part with any money at this time, or feel uncomfortable about it, just say no. Sometimes borrowers can make you feel so guilty that you succumb to the pressure. It’s far easier to say ‘no’ from the start than to have to hound your friend for the money.
Borrowing and lending money are business transactions and should generally be treated as such. If this all sounds too formal for you, then it’s best to just steer clear of lending. Give, instead. If you consider the loan to be a gift, if it gets paid back, then it’s a pleasant surprise, if it doesn’t, you weren’t expecting it back, anyway.
If you are always on the borrowing end, do remember that ultimately it is your credit behaviour and credibility that will make it possible for you to approach friends and relations to support you in your business venture or other need. Don’t abuse the privilege.