Lending Money to Friends
This is a column from regular contributor Clark.
I’ve read that one should avoid loaning money to friends (and relatives) and do so only if it is money or relationship they can afford to lose. I’ve not loaned money to anyone yet, but I’ve been the beneficiary a couple of times during my school days. Recently, while hanging out with friends, I heard something related to the above and thought I’d share the story.
Since our school days, lending money among friends has been common in our circle with no questions asked about the return date. Generally, the amounts were less than a thousand dollars and they were paid back within the next couple of months. I don’t recall any incidents that involved friends fighting over unpaid money after, say, 6 months. I think one of the reasons for these smooth peer-to-peer lending transactions, albeit without any interest, was the recognition by the borrowing friend that the lending friend was also in school – meaning that neither of them was rolling in money and that the lender was as likely to fall into a bad month, money-wise.
Fast-forward to this day, and some of us are employees while one or two are entrepreneurs. Such an entrepreneur friend (I’ll call him TomL) had lent some money (a few thousand dollars) to a mutual friend (I’ll call him AndyB) to cover his first home’s down payment. Now, I am not going to go off on a tangent to rail at the need for AndyB to buy a house at that specific time without enough of his own money for the down payment. Maybe, he read/heard somewhere that the market was getting hot and that he may miss the bus, if he waited longer. Or, the new mortgage regulations that came into effect in April 2010 had something to do with it (the money was loaned in January and a house bought before April).
Several months later, the money has not been returned. TomL had requested repayment, at least on an installment basis, but to no avail. TomL is unwilling to press further for fear of straining the relationship. AndyB got married recently and subsequently, invited a few friends (including TomL and yours truly) to his new home. The place looked great with excellent furniture, new LCD TV, and a few other gizmos. After our exit, the obvious question I had (for TomL) was “He doesn’t seem to be running out of money for furniture and other gizmos; doesn’t it annoy you that when your loan topic comes up, he uses the money-is-tight excuse?” TomL’s reply was “Do you think I could not see the stuff in his home? But do you expect me to ask him the same question that you just asked me?”.
Now, it is entirely possible that AndyB is speaking the truth when he uses the money-is-tight repayment extension phrase. Maybe, all the things we saw at his home have been bought on credit. If so, then AndyB has several problems – weakening friendship with TomL, piling debt and no potential lender from his old circle of friends for the future. On the other hand, AndyB and his wife are employed and if they are doing well (say, if the items were purchased with saved-up cash), then he is using the friendship as a tool to get ahead financially (who else would give an interest-free loan in a pinch?).
I do not know how this situation is going to get resolved. Maybe, someone will instill good sense and make AndyB repay the loan, at least in small installments. I cannot be that problem solver because it would put TomL in bad light, showing him as one who has been going around telling friends about the unpaid loan. There is a witness friend for this transaction but he does not want to “poke his nose” into someone’s affairs. As far as I see it, it has got to be TomL who takes the initiative (again but in a sterner tone). TomL is looking to buy a home of his own soon and maybe, that will be valid justification to ask for the money (oh, the plight of the lender!).
Have you ever been a borrower (of a few thousand dollars) from friends? What would you do if you were the lender in this case without losing the friendship?
About the Author: Clark is a twenty-something Saskatchewan resident employed in the manufacturing sector. He repaid around $20,000 in student loans and has been working to build his investment portfolio as a DIY investor (not trader) while nurturing plans to retire early. He loves reading (and using the lessons learned) about personal finance, technology and minimalism.