Risk Of Lending And Borrowing Money From A Friend

​ ​​​​​It's a piece of wisdom as old as time – money and relationships rarely mix. In a perfect world, you would never be in the position of being asked or asking for money from friends and loved ones. But circumstances beyond our control have a way creating less than ideal conditions. So, its entirely possible you or someone close to you will encounter a crisis where there seems to be no other option. Whether acting as the debtor or creditor, transacting within personal relationships comes with significant risks. It's important to set clear guidelines and boundaries and implement systems of accountability for each party to abide by. This will help to minimize the pitfalls and maximize the chances you will both emerge on the other side as close and trusting of one another as ever before. Risks Of course, the greatest risk of lending or borrowing money within a personal relationship is something will happen that prevents the borrowing party from repaying the loan in a timely fashion, if at all. This can, and frequently does, result in spite, eroding trust and the permanent souring of seemingly rock-solid friend and familial bonds. Choosing how to move forward depends on each party honestly answering one very important question: Lenders – Ask, "Would I feel comfortable never seeing that money again?" Be completely and shamelessly honest with yourself. Unless the answer is an unequivocal, unconditional yes, you may want to reconsider moving forward. Even if you love that person with all your heart, trust them completely and are certain they will do everything they can to return the money, it's impossible to predict the unforeseen circumstances that could prevent them paying you back within a reasonable timeframe – if ever. It's also impossible to predict how you'll react to every dollar they spend and every interaction you have with them thereafter. Borrowers – Ask, "How much of a priority will I make paying the money back?" Unless you would be willing to put yourself in a genuinely uncomfortable position (e.g. foregoing meals, missing numerous social opportunities, rationing heat and electricity) to avoid betraying your friend or family member, you may want to reconsider asking for money. It's not that they would ever expect you to make those kinds of sacrifices – but unless you care more about the relationship than you do your own comfort and wellbeing, it's likely not worth the risk. As above, you cannot predict the future and the potential obstacles that could derail your repayment schedule. If you're not willing to go to the ends of the earth to maintain their trust, it's likely best to find another way. Guidelines, Boundaries and Accountability Assuming you've answered the above questions honestly and thoughtfully and decided to move forward, the next step is to establish clear guidelines and boundaries to the lending or borrowing process. Lenders: Give only within your means – Be clear with yourself and the other party about what you can afford to spare without also putting yourself in a negative financial position. Set expectations – Let the other party know when you expect to have the money paid back in full. It can be tempting to say something along the lines of, "Pay me back when you can afford it."  However, unless you genuinely mean it, that places the borrower in the unfair position of interpreting an unspoken deadline that may or may not exist in your mind. Get it in writing – Knowing you cannot predict how events will unfold, document the loan and repayment schedule clearly in writing and have both parties sign to the agreed terms. At best, this keeps both you and your loved one on the same page. At worst, this qualifies you as an unsecured creditor in the event they file for bankruptcy or consumer proposal. Borrowers: Borrow only within your means – It can be tempting to ask for the amount you need to cover the expense you need to pay. However, you first need to be honest with yourself about what you can afford to repay over a reasonable timeframe. Clearly define your repayment schedule – Describe in detail (and put in writing) how you intend to pay back the loan. This includes providing the expected dates, amounts and process you will follow until the debt is cleared (e.g. $100.00 on the first and 15th of every month via Interac e-transfer). Communicate – If something happens that will cause you to breach the above agreement, communicate early, clearly and in detail about what happened, how many payments will be missed and how you plan on making it up.  Other Considerations From both a practical and emotional standpoint, there are several other considerations both lenders and borrowers will need to make when deciding whether to ask for or lend money to a friend or loved one. These include: Lenders: Never go in debt to lend money to someone else.Never lend money you cannot afford to lose.Ensure the borrower feels comfortable speaking with you if they encounter trouble repaying the loan.Acknowledge the risk your relationship may never go back to normal. Borrowers:Always be gracious to people who lend you money.Acknowledge you may have to make sacrifices or experience discomfort to protect your relationship.Understand the lender's expectations and accept their loan only if you agree to them unconditionally.Respect your loved one's reasoning if they decline your request for a loan.Acknowledge the risk your relationship may never go back to normal. If you've found yourself in a position where you cannot afford to pay your bills and worry family and friends may be your only option, a Licensed Insolvency Trustee may be able to help. During a no-obligation, Free Confidential Consultation we will review your financial situation to determine your best path to a debt-free future and financial fresh start. Whether that means a Life-Changing Debt Solution or simply offering much-needed budgeting advice, we can get you back on track without putting unnecessary strain on your relationships. Based out of Toronto, Mary Plahouras is a Manager at MNP LTD. To learn more about how MNP Debt can help, contact our local office at 416.515.3879 or toll-free at 310.DEBT (310.3328).