bank banking banknotes business

5 Important Considerations Before Lending Money

Last Updated on March 31, 2021 by Rat Race Running

Lending money is one tricky subject because it can make but more likely break relationships.

As a rule, I don’t take personal loans from friends and family members, and I’m incredibly cautious about lending money. I may appear to be stingy at times, but I’ll take it as a compliment.

How many times have we heard or read stories of broken relationships, including family, friends, and co-workers, because of unpaid debts?

So, by limiting the potential problem caused by debt, I am also narrowing the possibility of these damaged relationships.

Money topics, including the debt cycle, are uncomfortable topics to discuss in a typical Filipino setup. However, these topics are essential to address earlier if we are to stop the rat race cycle.

Though it may appear to be normal to get into debt, I promise you it’s not! And if you’re a fresh graduate or a single young professional, you must learn how to avoid stepping into the debt trap.

Personal finance is one of the advocacies of this blog, so I’ll share my thoughts when someone asks if they can borrow money.

The Book of Proverbs offers many snippets of wisdom about money, which, if applied, will change our perspective about the uncomfortable “M” Word.

“The rich rule over the poor, and the borrower is a slave to the lender.”

Proverbs 22:7 (NIV)

The Importance of Saying “No.”

But before we dive into the five considerations when lending, I’ll reemphasize the importance of saying “no.” 

If someone asks to borrow money, your default answer should be “no,” unless they managed to pass specific criteria.

It is also important to note that you don’t owe any explanations when declining their request. 

Don’t imitate other people who choose to lie instead of saying no because it makes them feel uncomfortable.

My Stand Against Lending with Interest.

In the times when I lend money, I never asked for interest. I believe that it is usury and is just morally wrong, even if disguised as helping others.

“Whoever increases wealth by taking interest or profit from the poor amasses it for another, who will be kind to the poor.”

Proverbs 28:8 (NIV)

Here are five considerations that I make before lending a considerable sum of money.

1. Your Relationship

The first consideration is how close your relationship is.

Are you good friends or mere acquaintances? Are you an immediate family member or far-away relatives?

Who you lend to should depend on your personal experience with them regarding paying off debt.

Personally, I would choose to lend to my close friends and family and say ‘no’ for the rest.

It is essential to remember that what you are lending is more than just money. You are adding the virtue of trust along with it.

2. The Amount

The second consideration is the amount that they are trying to borrow.

I have a maximum amount that I am willing to lend. Doing so gives me control of my budget.

I also don’t lend to multiple people at the same time. So as long as a previous borrower hasn’t paid yet, I will not entertain other borrowers.

I simply tell them that I don’t have any money that I can lend at the moment.

3. The Purpose

The third consideration is the purpose of the loan.

Is it for health or personal emergencies or just for ‘wants’ like a new pair of shoes or travel expenses?

If it’s the latter, then it’s definitely a ‘no.’

The purpose of the loan is very important. Others may say that the lender doesn’t have to know where the borrower will use it since they will pay it anyway.

However, since I will not gain any interest, I maintain the right to ask the loan’s purpose and determine if it is valid or not.

You may refer to my other budgeting posts to help you with your personal finance.

4. What are the Specific Details

Once the first three considerations are met, then we can talk about the specific details.

It is the borrower’s responsibility to be true to their words and pay what they borrowed.

So many people’s trusts were broken because of the unfulfilled promises about agreed-upon terms of payment.

I also think that the date of payment of the loan should be the borrower’s decision. So it is the borrower’s responsibility to keep their promise.

It is better to say that you don’t know when you will pay instead of giving a false promise of paying next month.

As a protection to both parties, putting the agreement in writing and notarizing it is not a bad idea.

5. Are There Other Options

If the amount I allocate for lending is currently deployed, I will still try to help through non-monetary ways. However, I will not do the following:

  • I won’t borrow money on other people’s behalf.
  • I won’t participate to be a co-maker or in collateral programs.
  • I won’t join any multi-level marketing groups.

Final Thought:

Lending money, especially to close family members and friends, is very tricky.

So, it is best only to lend money that you are willing to lose.

However, it is always expected that the borrower will pay. Like in my #2 consideration, no one can borrow unless the amount borrowed is paid.

Lending and borrowing is bound by trust, and as the song “Tsokolate” by Parokya ni Edgar said, “Parang tiwala ‘pag naubos na, mahirap nang ayusin pa, ‘di kayang ipag-dikit ang tiwala ‘pag napunit.”

Always remember that money is not the main issue in personal loans and debts. It is the relationship, trust, accountability, and integrity that go with it.

Advertisements

Leave a Reply