7 Checkpoints Before You Lend Money to Your Friend

We may feel obliged to lend, or our values may drive us to go all out to help, but it is very important to consider this 7 point checklist to strike the right balance in this sensitive situation.

Money is the root of all evil. 

I denied this statement when I was writing my first book - From the Rat Race to Financial Freedom, back in 2014. And I still stand by the fact money is NOT the root cause of evil. It is the greed or extreme love for money that may trigger evil deeds from us, humans.

So, if your friend or a close relative in need, is seeking money from you, you have two simple choices - either help the person, or don't.

And what use is the money if it can't be of help to someone who is in need. But then, money is also known to blow away some of the best friendships and relationships. We may feel obliged to lend, or our values may drive us to go all out to help, but it is very important to consider certain points and strike the right balance in this sensitive situation.

Before you lend out your hard earned money, you must go through this checklist:

1/ Find out the frequency

Try and find out how frequently is your friend seeking money from others? Your friend may have come to you for the first time, but you may be just one in the chain. He may be a habitual seeker of asking money. If that's the case, it is important to at least know whether your friend has been returning money in time from the people he bought earlier. If not, the root cause may be somewhere hidden, and you may be emotionally black mailed into lending money, with likely disastrously consequences.

2/ Find out the reason

Not only the frequency, but the reason for asking money is critical. If it is a medical emergency, it may need a different response. But better find it out. Is it lavish lifestyle? Is it job loss? Is it family feud? Is it betting, drinking or gambling? Is it addiction to over spending? Is it business losses? Is it thoughtless stock market trading? It's better you know. You have all the right to ask relevant and pinpointed questions before lending your hard earned money. Don't shy away from knowing the reasons. If the reasons are not routine, and seems a one-off genuine case, you may be better off providing help.

3/ Try offering advise first

If someone is asking money because of habitual reasons or reasons such as lavish lifestyle, it is definitely more prudent for a friend to offer advise first. That's why you are a friend, no? You are not supposed to be a cash cow. You are supposed to tell facts on the face of your friend, so that he or she becomes a better person. If it is financial mismanagement, and if you have the skills, it is better to try and coach your friend on basic money management principles (as highlighted in the book - From the Rat Race to Financial Freedom). See if you can help them setup an emergency fund, or if you can automate their savings, spending & bill payments.

4/ Try to push the deadline

Someone in need is typically clear about the minimum amount he or she needs, and by when they need it. If your friend doesn't seem to be keen on listening to your advise, then try and buy some time. Tell them that you would think about their need and come back to them. Some of the issues get resolved with time - either of their own, or through someone else's help (of course, you will not be the only person from whom the help has been asked).

5/ Learn to say No

If your friend refuses to accept any of your advise and is only interested in money just because you have been providing the monetary help easily, and if lending money is going to put your financials and family symphony under stress, you might be better off saying NO this time. It might turn out to be better for your friends long term interest. He might be pushed into thinking the root cause of his or her situation, and take corrective action.

6/ Understand the definition of Help

If, even after all your efforts and research, you feel the urge to help your friend in need, please go all out and help. But, for your own emotional needs, it is very important to understand the definition of help. Help is something that you do to someone in whose return you don't expect anything. This clearly means that you give the money, and just forget about it. You have helped. That's it. Help is always a one - way communication. Expecting your money in return or expecting anything else in return is not help; its a business. And you don't want to do a business deal with your friend. Do you?

7/ Understand the tax implications

If you have decided to help your friend, its important to understand the tax implications that are going to come on you. If you have to liquidate some of your capital assets like mutual funds, stocks, gold etc., consider the fact that you will also be liable to taxes on the capital gains that you will accrue. Even if the money comes back to you after a few days, the taxes still need to be paid on the liquidated amounts. Its better to consult your financial advisor and seek the best way to liquidate the funds that are needed.

Summary

I have gone through many such experiences in life with some of my very close relatives, have learnt by spoiling some of the best relationships, and have come to the conclusion that never ever offer monetary help to anyone - even to your closest relatives. Crisis comes in everyone's life for their own good. They will learn and come out stronger. The only exception that I keep for myself is the 'help' provided if someone's life is at stake. In that case, I clearly remember the definition of help.