Sooner or later someone you know will ask you to lend him/her money. It happens to everyone. Here we are talking about lending money to help someone rather than lending money to earn interest. You should consider the following before lending money to anyone.
- Can you afford to lend money?
- Are you helping the person by lending money?
- What is the probability that you will get your money back?
- What would it cost you to lend money?
Can you afford to lend money?
Alice is living from paycheck to paycheck and barely making ends meet. She is hardworking and responsible. Her brother, Bob, asked her to lend him $1000 for 3 months. Should she lend him money based on this information alone? If Alice lends the money, she won’t have enough for rent, food, and other necessities. For Alice, lending money means going into debt. Borrowing to lend money to someone else is a bad idea. She cannot afford to lend money.
Bob asks David for $1000 that he will pay back in 3 months. David has a well paying job and sufficient savings. $1000 will not face financial hardship from this action and his lifestyle is not impacted by this. He can afford to lend $1000.
Are you helping the person by lending money?
If Bob is asking money for his drug addiction or to buy cigarettes or alcohol, are you helping them? No.
Suppose Bob is chronically running into financial trouble. Every time this happens, someone has to help him or bail him out. Would David help him if he lent him the money. No. His financial help is only keeping Bob from learning the lesson about the importance of sound financial management. Bob needs to learn basic financial skills just like every child needs to learn to brush their teeth. That is the root cause of his problems. Lending money is not helping. Instead give him a book or register him in a course that teaches how to manage money.
Alice asks Bob to lend her money for an emergency. She is hardworking and responsible but doesn’t have enough savings to deal with emergencies. Yes, David’s loan will help her.
What is the probability that you will get your money back?
The assumption with any money lent is that it will eventually be paid back with gratitude. In reality, personal loans are often not repaid and often gratitude is not part of the transaction.
If Bob is an addict, will David get his money back? No.
If Bob is financially irresponsible, will David get his money back? Unlikely.
What if Bob lends money to Alice. She is hardworking and responsible but just doesn’t have enough savings to deal with emergencies. Yes, she probably will repay. Responsible and honest people tend to honor their obligations.
What would it cost you to lend money?
Alice is living at the edge. A loss of $1000 will immediately translate into debt and financial hardship for her. The cost of lending money for her is interest, financial stress, and emotional and health trauma caused by financial stress.
For David the cost of lending money is the loss of the insignificant savings account interest.
Conclusion
We work hard to earn money. We practice discipline and self-control to save money. Then we lend that money to someone, it better achieve something meaningful. It should help someone deal with a critical emergency. It should help someone become successful. It should save someone’s life or improve someone’s life. When you help someone, you are taking their burden and placing it on your shoulders. Don’t carry the burden of someone’s addiction, immaturity, or incompetence. Carry the burden would really help them.
Lend only when you can afford to do so, when you know you will be helping someone, and when it won’t cause financial hardship. Don’t lend if there is not chance of repayment. If you want to help someone, give it away as a gift but when you agree to lend money, insist on repayment.
Lend your money wisely.
