Most of us have faced this dicey financial situation at some point. A relative or a close friend comes to us with a tale of woe about some great financial disaster that has befallen them, then they ask you for a loan to help them get through their disaster. Your heart wants to help them, but your head says no.
Money360 has one piece of advice on how to handle this situation: never, ever loan money to a family member or a friend. By doing this, you’ve injected a business relationship into a situation where there was no relationship before, and thus the relationship will never be quite the same again.
If you feel like you must give them the money, make it a one-time gift. You should tell them that if they right themselves in the future, you would be happy to receive a gift in return. This way, there is no burden of debt in the relationship; you’re giving the money with no expectation of any return.
If you can’t easily afford to “gift” the money, then don’t do it; otherwise, you will introduce a level of resentment into the relationship. I have done this in the past in situations where there was a major financial burden put upon people who were otherwise financially responsible. In that case, they didn’t ask for any sort of loan; I just asked them how they were doing and gave them the money with the clear caveat that it was a one-time gift given because I loved them very much.
You should also never co-sign any sort of financial instrument that you don’t directly control. This makes you legally liable for any financial mistakes the other person might make, unintentional or otherwise.
So, how do you say “no” in this situation without seeming like the “bad guy”? The most important thing you can do is to listen carefully to their tale and ask lots of questions; many times, your ear and your advice are more valuable than a loan. Before you tell them no, do a little research with them to find other solutions to their situation. If they’re sinking in credit card debt, look into credit card counseling. If they’ve got an emergency expense, look for ways that various agencies can help cover the burden. This way, you can both come out of this with some education.
When you finally need to make it clear that you won’t loan them money, state that the reason you won’t loan them money is because the relationship you have with that person is not something you wish to taint with a financial arrangement. You should also offer any sort of non-financial assistance that you can offer: a couch to sleep on, some home-cooked meals, some professional advice, and so on are all worthwhile things you can give with minimal financial impact.
One fear that many people have is that saying no will damage the relationship. It will only damage the relationship you have if you just let it sit there and forget about it. Keep in touch with the person who requested the loan and ask them how their situation is going. This is an important moment – the person is in obvious need, so you need to be involved in their life right now, even if it is not on a financial basis. You may be able to help them in non-financial ways right now.
In short, loans aren’t the answer; love and an open ear are the answer.