My family and friends get a good chuckle about how I am so tight with a dollar poor George Washington begs to be released from my grip. Fine. There's a reason why they all come to me for money. It's because I'm the one that has it. Someone needs to borrow money from you? Unless you want to make a gift of the money or cause no end of personal grief, learn from my hard lessons before you make the same mistakes I have.
- Ask questions - What is the money for? Your cousin wants to borrow a chunk of cash from you, you have every right to ask what the money is for. Your response can vary depending on their response. Here are some examples from my personal experience. They tell you it's private. Fair enough. You will have to say no. Chances are your cousin isn't going to buy drugs or prostitutes with your money, but you need to know what it is you are funding. They need the money for a vacation. Feel free to laugh in their face. Loudly. For a long period of time. Absolutely no. This is not worthy of a loan. Vacations are to be earned. They need the money for car repairs. Okay - this is reasonable. You will accompany your cousin to the garage, pay for the repairs and your cousin can pay you back as agreed in advance. This is non-negotiable. They need the money for medical expenses. What kind of medical expenses? That's private. Unfortunately you cannot help them unless they are more forthcoming. You're not paying for breast augmentation. They need a biopsy done on that funny lump in their armpit. Write them a check for cash and tell them that they are in your thoughts and that the money is a gift. They need help paying for their wedding. The answer to this is absolutely no. If they can't afford to get married then they shouldn't be getting married. If they still want to get married then they need to have the wedding they can afford. Nothing is more foolish than a couple just getting married and going into debt over the party. This sort of idiocy spells doom for a marriage.
- IOU - You've agreed to give a loan. Write out an IOU and make them sign it before you hand over the cash. But you don't want to make them uncomfortable. You're a nice trusting person. Fine. Consider the money a gift and blow it a kiss goodbye. If they were comfortable enough to come to you for money, then they should understand that you need to also feel comfortable making the loan. If making them sign an IOU causes them to question your faith in them, remind them that they are actually coming to you for money that they don't have. Feel free to question their financial savvy. A bank makes a customer sign a promissory note. Why shouldn't you? One final suggestion - put a date on the note both parties agree the money needs to be paid back by along with a nominal amount of interest. You're not a charity.
- Payback - Somebody owes you money they need to pay you in cash. They want to hand you a check? Tell them no. You want cash. Be that person that people know they must pay in cash. I'm that person. You'll never have your sister bounce a check on you again.
- Checks - I don't remember how long ago it was (probably a decade at least), but I took a check from a person that I shouldn't have taken a check from (unfortunately a relative but that's another story). That check bounced. I was charged for that check bouncing. Many other checks bounced because of that check. In the end, I think I paid around five-hundred dollars in bank fees. The ultimate expensive lesson learned. Do not take checks and if you do make it very clear that if it bounces the person writing it is liable for all charges incurred. They may just take the check back and give you cash instead.
- Default - So you have the signed IOU in hand. The money hasn't been paid back by the date. What to do? This is tricky. With the dated IOU generally speaking people pay you back on time (especially family). If they don't pay you contact them. If you agree to a new pay date get a new note signed along with an increased amount of interest. YOU ARE NOT A CHARITY! If your money were in a bank, you would be earning interest. If the person that owes you money is not family take them to small claims court without any hesitation. You have a signed IOU with a pay-by date and they do not have a leg to stand on. If the person is family you might have to just let it go and take it as a lesson learned to never loan that person money again in the name of family peace.
Speaking from my own experience, I have been the person that loaned money to the deadbeat relative. The only upside is that they will never ask you for money again and if you don't want to talk to that person all you have to do is mention the money they owe you whenever they call. My wanting the money back and insisting that it be paid turned me into the family pariah on a couple of occasions. Somehow I was the bad guy because I wanted to be paid back. I've never understood how this worked, but I know I am not alone. Several of my fiscally responsible friends and I have discussed this. It seems to be that we are required to make up the deficit of our less responsible siblings and cousins. Because we have been responsible, saved when we could have spent, stayed home when we could have gone out, waited for the sale instead of indulging in the impulse purchase we are somehow liable for easing their burden of debt. There is this assumption that the wealth needs to be spread out. So I have taken to adopting my final suggestion.
- Plead poverty. I've never been one for expensive vacations or cars. I live a pretty simple life that is frugal and well balanced. I do love my luxury goods, but I love that all that much more because I seek them out at bargain prices. I keep my cards to my chest when it comes to my money. People are not going to come to you for a loan if they think you are as hard up as they are for cash. I'm not suggesting they we should live like Scrooge and keep our pile of lucre under a hearthstone, but I am saying that throwing around cash like seeds is going to attract crows. Be smart about your money. If you get a windfall, don't make a public announcement. There is a reason distant relatives descend on lottery winners looking for handouts.
My final suggestion; be smart. Trust your gut. If you don't want to make a loan, don't do it. You've mastered resisting the urge to impulse spend, you've saved your money, you've done what you are supposed to do. If your gut is telling you that your brother is never going to give you back the money then don't loan it to him. You can give it to him as a gift, but don't make a loan of it. The only time to make a loan to someone you are certain will never be repaid is if you truly do not ever want to see that person again. Nothing will scare someone off as quickly as knowing they owe you money and that you will remind them every time they are near you.