The dos and don’ts of lending money to someone

The best way to protect your finances and potential problems is to have a clear plan, set boundaries and manage your and the other person’s expectations.

Here’s what to consider before you make this type of decision.

Be realistic

As much as you might want to help someone, you must be realistic about (1) whether you can afford to help them and (2) how much you can afford to give them. Giving someone money you can’t afford or don’t have puts you in the same position as the person lending from you.

How much can you afford to lose?

If you’re lending money to someone, you always run the risk of not getting it back, so consider whether you’ll be able to absorb the financial knock and still keep up with your expenses if they don’t pay you back, or if they pay late or only partially?

Don’t lend them your credit

If you don’t have the cash to give them, be careful of giving away your access to cash and credit because you’ll be handing over money that you don’t have and this could put you out of pocket, meaning you’ll be the one stuck paying double debt: theirs and yours.

It could also negatively affect your credit score and influence your ability to achieve your financial goals now and in the future.

Set terms and boundaries

To avoid misunderstanding, conflicts and resentment, open and honest conversation is needed. Put it in writing and ensure the person you’re lending the money to understands and is accountable to the following:

• The money isn’t a gift, and there’s an expectation of repayment.
• How will you get the money back? What are the repayment terms?
• What happens if they don’t repay the loan?

Lower your expectations

If someone is coming to you instead of a bank, then they are likely already in financial trouble. If they can’t afford their current situation and you lend them the money to deal with it, where will they get the money to pay you back?

If you can or want to lend someone money, you need to do so with open eyes and know that however good their intentions, they might not (be able to) pay you back or that the repayment will be slow.

It’s okay to say no

It’s not easy, and it might have consequences, but you are neither obliged to lend money or fix other people’s money problems nor responsible for others’ bad financial decisions. Don’t be guilted or pressured into making a decision that will affect your financial security.

If you’re not confident that this person will be able to pay it back, it’s okay to protect your financial health.

_{Disclaimer: This article is solely intended for information. It does not constitute financial or investment advice or recommendation. Speak to a financial advisor or registered financial professional before making any financial decision(s).}