Personal Lending - basic guidelines
The whole idea of personal lending is sticky to say the least. It can be a real tar baby, no matter how you look at it. The main problem is that it's a business proposition, but it's usually done in a casual manner, and that causes problems.
Change the casual aspect of lending money, and you'll get fewer requests, and probably be happier when you do lend money to friends and family.
This discussion will present a set of guidelines that you can use when you're considering lending money.
The guidelines can also be used to help manage your expectations if you need to ask for a personal loan someday.
Of course, these guidelines are mine and not yours. I can't tell you how to handle your money, but I hope that some of my ideas and suggestions will rub off or otherwise be useful.
What are You Lending?
Of course, we talking about personal lending of money. So, what is money? We need to appreciate what it is we're lending - that's rule #1 of the money game.
Besides being a medium of exchange, money represents your planning, your labor, your talent, your hard work, and perhaps the results of careful investment. Money also represents what you have protected and conserved through frugal living, delayed gratification and being a responsible individual.
All those values are wrapped up in your money. Need I say that it's worthy of protection?
Basics on Personal Lending
Here are the basics if you're going to consider lending money to someone. I suggest that you consider all of the numbered criteria below, and apply the ones that you think are warranted based on the situation.
In my view, the first 6 are required. With larger amounts and longer terms of lending, items 7 and 8 are also warranted. But, in the end, the decision is yours.
- I suggest that personal loans only be given to members of the family and friends. I also suggest that loans be given only to members of the immediate family, and longtime or lifelong friends.
Simply because these are the type of individuals that are most likely to have a vested interest in maintaining a good relationship with you. Personal lending has a way of ruining relationships, so make certain that the person borrowing the money is someone that has something to lose.
So, only those people that have a good relationship with you should be considered. Otherwise, they might have a less than solid interest in staying in your good graces.
- Only those having a track record of integrity should be considered for personal lending. A bank doesn't lend money to people with poor credit because they are a bad risk. Why should you take unreasonable risks, just because it's personal lending instead of institutional lending?
You've worked too hard to put your money at risk.
- Insist on knowing what the money will be used for. Is it to pay off another debt? If so, then that's not a good sign. Paying one loan off with another is a cousin of the Ponzi scheme, and you'll not want any part of it.
Don't be shy. If people have the nerve to ask for your money, you certainly have the right to know what it's going to be used for. What the money is used for is related to the likelihood that you'll be repaid, so inquiring is in order here.
- Irrespective of the person's integrity, make certain they have a means of paying it back. If not, then why would you want to lend the money in the first place. I wouldn't.
When engaged in personal lending, be certain the borrower is employed or has other assets that can be used to pay back the money if necessary.
- Put it in writing. If it isn't in writing, it isn't real. A simple promissory note is a good form to use. If you need to get your money back in court, then you have evidence that it's owed to you.
- Establish a schedule for repayment. Again, if it isn't in writing, it isn't real. A simple schedule is one way of establishing expectations. If everyone has the same expectations, then there are no excuses.
- An interest rate should be assigned. It can be lower or higher than what's in the marketplace, but it should be reasonable. If your money is in the bank, a certificate of deposit, or other financial instrument where it's earning interest, then you should expect at least that level of return if you lend the money to someone else.
If you don't assign an interest rate to the loan, then you are subsidizing someone else. I don't consider it my job to subsidize anyone else, and neither should you, but it's a choice that you can make.
Use a simple loan payment calculator to figure out monthly payments based on the principal and interest rate. Print out the results and attach that to the agreement and schedule.
- If you're lending a large amount of money, then collateral is in order. I'll let you decide what "large" is. In my mind, we're talking something over a thousand dollars. Perhaps your idea of large is even larger.
Alternatives to Personal Lending
There are two simple alternatives that you might consider when it comes to personal lending. The first is simple - just say no. Make it your policy not to lend money. There are two reasons for this:
- Feeding a dog will only encourage it to come back. You might become a personal loan officer for another, and that's probably not what you want.
- You could be enabling others. If people can't make it on the money that they earn now, and they can't get a loan at a financial institution, then they might have other problems that they need to face, and you wouldn't be helping them by allowing them to avoid facing their problems.
Second, you could just give the money away. With all the hard feelings that personal lending can involve, it might just be much better and easier to give it away as a gift. Just be mindful that you could be "enabling" that "dog" with a gift as well as a loan, so keep your eyes wide open anytime you consider giving money away as an alternative to personal lending.
Done with Personal Lending, take me back to Managing Money
There certainly is a broad scope of topics here at Frugal Living Freedom. When you think about it, money permeates so very many activities in our lives, therefore, being frugal encompasses a wide range of interests, from being employed to taking a vacation, and just about everything in between. Enjoy the variety, pick up some new ideas, and start making frugality a part of your signature.
I'm a big proponent of being debt-free, and I mean entirely debt-free - no mortgage payment. It's not essential for financial freedom, but you'll love the feeling once you get there. If you didn't have a rent or mortgage payment, how much more could you do for yourself with your current level of income? I suspect plenty.
If you ever hope to see an abundance of wealth, you need to plug the hole in your boat. The wealthy don't necessarily make lots of money, instead, they know how to hang onto what they make, and make it work for them.