Hazards of lending money to close friends and relatives

We used to bailout our friends or relatives whenever they are in financial trouble. The loans may vary from Rs 100 to even Rs 100000 depending on the situation, need and the lenders lending ability ( I would call it as a soft corner). I used to get calls from my friends like

“Machi, my home loan is due today and I don’t have sufficient fund in my account could you transfer it? I will give it back in two days”

 “Wow I like this shirt da, could you use your credit card to buy it and I will transfer you after reaching home” 

Sometimes the request will itself be like a demand like “You were asking me to introduce my girlfriend’s roommate right? I am taking my girl friend and her roommate to a nice hotel for my birthday, so lend me 5000, you can also join us” This is a tough one to turn down.

I used to be the first person to lend money to my dear ones, when I started earning until I had two bitter experiences.  I was not fortunate to get a job in campus, I tried hard for around 8 months and got placed so when I got placed some of my friends where still searching for job. One day I got a call from my close friend who was in Bangalore asking me to transfer Rs.5000 to pay house rent that too not for him but for his close friends. He promised me that he will send it back that month end. My salary itself was Rs. 7000 and also I was paying EMI for my bike, but he was my best friend and we know each other for almost 8 years so I transferred it from my meager savings.  I expected him to pay me back next month but he didn’t, I expected him to call me back but he didn’t when I called him he apologized and told me that he will transfer it next month. Next month when I called him he neither attends my call nor called me back.  Few months later when I was in dire need for that money I asked one of my friends to call him and check with him, the reply I got was shocking “He is earning right? Then why is he pestering me like this for just 5000 Rs? Tell him that I will settle his money soon and ask him not to call me often“

In another occasion I loaned my colleague Rs 20000 who needed it for his surgery, he promised me to pay me back in installments.  He gave me 8000, 2000, 2000 and 5000 in the span of 8 months. Then after a year I found that there is no sign of him paying back the rest. When I asked him, he said he paid the entire amount. I checked my entire account but I found 3k short, I asked him again, he said he paid it in cash. I used to note down all my transactions using one of these tools, so there is no way that I can miss it but still I couldn’t argue with him.

Some of the attributes I observed on people taking loan from friends/relatives are:

• They just want us to help them in all the occasions. They don’t care about our financial positions or commitments.
• Even though they have option to avail soft loan with minor interest like loan from office or even taking salary advance, they don’t do it they just want an interest free loan with no commitments.
• Most of them with my experience will never payback in time or pay it as a whole. They split it into small pieces where it loses its value.

Lessons learnt:

• Make sure that if the person is not paying back to you on promised time it won’t affect you financial goals.
• Don’t be too generous to put a salary advance and loan it to someone.
• Never lend someone huge money for the first time. If you have already lent some money to him and he sticks to the deadline or at least have courtesy to call you back and inform you about the delay then you can go ahead.
• Avoid accepting part payments if you can’t then at least ask him to send an email whenever he transfers the money quoting the amount he has transferred. Make sure to save the mail.

Whenever I need some money I will take this approach

• See whether I can avoid/defer a buying decision to avoid loan.
• See whether I can borrow from my friend and pay it back within 10 working days.
• See whether I can use credit card or sell some of my shares/mutual funds and finally
• Ask my dad.

So I suggest you people to go slow on lending.  If you decide to lend make sure that your relationship won’t turn worse. Whats your take on Lending money?

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