I have lent money to some friends and family. Although most repay their loans some don’t. If the loan is pursued this can lead to a strain in relationships. So I have developed a simple criteria to determine who and how much to lend to at any given time.
- Treat the loan like an investment. So determine the risk of loss before advancing any loan. For friends and family I would recommend simply treating the loan as a gift which is not expected to be recovered. So limit the gift amount in any case. Remember a borrower is a slave to the lender. You don’t want to enslave your friends and family.
- Only lend money you can afford to lose. Friendly loans are not secured therefore the risk of loss is quite high. So only lend money you don’t need immediately and which you can afford to lose.
- Only lend to credible people you actually know. Don’t lend to anyone who has failed to pay back in the past. Once bitten, twice shy!
- For big loans insist on collateral and a written agreement. You work so hard for your money. Why should you just give it away. If the person is uncomfortable with your terms gladly refer them to the nearest bank.
- Assess creditworthiness of the borrower. Does the person have a dependable source of income? Does the project they are borrowing for make business sense? Is the borrower a person of integrity?
- Allocate a small proportion of your money to sorting out other people’s problems. Allocate most of your capital to growing your wealth. It is easier to help more people when you are rich. It is not being mean. It is being prudent with your hard earned cash!
- Agree clear repayment terms for any money before you lend . Typically repayment period and interest if any.
- Lend through an intermediary. For example when you buy a fixed deposit in a bank you are effectively lending money to many of the bank’s customers. This is much safer.
- Lend to the government by buying treasury bills and bonds. This is quite safe and you are helping your government to deliver critical services to the entire population.
- If you have to lend then you might as well make some money in the process. Charge some interest on the loan to compensate you for the risk you are taking and for the opportunity cost you are incurring.
So this is my criteria for lending. It may seem tough but the reality is achieving financial freedom is paramount for me. I have made sacrifices to get and stay on this journey and I have to protect my interests first.