Should you 'neither a borrower nor a lender be' when it comes to friends & family?

It can be a sticky situation in money matters while lending to friends/relatives/colleagues/business partners.

During a recent discussion about a financial plan, a client brought up a sensitive topic  -- how his relatives and friends owe him money. The total amount lent to various people over the years was substantial, around Rs 60 lakh. Asked if he was expecting it back, the client said he would reclaim it sometime in the future, although there was no mention of payback while giving the money.

Lending to friends / relatives / colleagues / business partners can be tricky regardless of whether you choose to lend or not (preferring to keep money and relationships separate). Either way, there's a risk that relations may sour in the future.

As William Shakespeare said: `Neither a borrower nor a lender be, for loan oft loses both itself and friend.'

Here is how you can deal with such situations depending on your willingness and intention:

Have the nerve to say NO: it is important to think straight in such situations as a half-hearted decision based on emotions will be a disaster. Because that would mean you are lending money but do not really want to. This leads to resentment, just because you did not have the courage to refuse. So, learn to say ‘NO’ at the outset if you do not want to lend. It may be uncomfortable to turn down a friend / relative, but that doesn’t make you selfish. On the contrary, it may save you from bitterness later.

There are many ways you can refuse politely:

- I am not comfortable lending money.
- I am sorry, but I am not in a position to lend.
- It is not feasible right now.

Keep it short and brief and do not discuss your finances in detail. You can even help your friend brainstorm about other sources of funding. If he is wise enough, he will gracefully accept your decision and appreciate the offer of helping in other ways.

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Lend for the right reasons: if you decide to lend money to friends / relatives, it should not be out of guilt or pity. Your decision should depend on the borrower’s situation and character. If you know the person is an irresponsible spendthrift and has a history of taking money from close ones, then you may not want to encourage such behaviour.

Ask for the specific purpose of the loan. Knowing the same will help you decide whether to lend or not. You may also be able to gauge how transparent and forthright the borrower is in sharing his financial problem with you. A medical emergency in the family or a stressed business could be the few situations where you may want to consider helping out financially.

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Lend money you can afford to lose:  there is a possibility that your friend may not return your money, willingly or otherwise. So, avoid lending 100 percent of the amount if it's a big figure. Lend only what you can afford to lose. Decide the amount you can part with taking into consideration your short-term goals and expenses that may be coming up.

Do not hesitate to mention payback: while lending to near and dear ones, the issue of payback is crucial and has to be brought up. If you do not mention it, the borrower may think that you do not expect the money back and are helping out of charity.

Without sounding rude, you can tactfully say that you require money in the short / medium term for some goal. This would give the borrower a subtle hint that you are expecting payback.

Write it down:  if not with friends / relatives, this is imperative when lending to business acquaintances or partners. Irrespective of the borrower’s intention of repaying the money, it is better to put it in writing. This could avoid any friction in the future on the conditions set at the time of loaning the money and the borrower will also take the payback seriously.

It does not have to be a legal document. A small hand-written note including the date, loan amount, signatures of the two parties and a witness, date of payback, and interest chargeable (optional) would be sufficient.

Keep your family in the loop: financially helping a friend / relative may not go down well with your spouse, parents, etc. They may blame you if something goes wrong in the future as they may have their own reasons for not lending.

Hence, ensure that you seek their opinion, take them into confidence, and mutually decide on the matter. Also, maintain a record, which your family can access in your absence.

The writer is the founder of GoalBridge, a SEBI-registered investment adviser.

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.