Photo: Marc Royce
You won't hear me argue against the fact that helping family or friends who are in need is an act of grace. You will, however, hear me argue against lending them money if you can't afford to do so. No matter how wonderful your intentions are or how desperate someone is, you must think twice about loaning money if doing so will imperil your own financial security in any way. Here are four ways to figure out if you can afford to lend a friend a financial hand:
1. You have no credit card debt, your family has an eight-month emergency fund tucked away in a federally insured bank or credit union account, and you are on target with your retirement savings.
2. You can make the loan from extra savings. The last thing you want to do is increase your own debt load to help someone else.
3. You—and your relationship with this person—will be just fine if you are never repaid one penny. You must go into the deal thinking, "I hope to be repaid, but I'll be okay if I am not."
4. Your friend or relative agrees to draw up a simple loan document (for $8 you can download a promissory note from Nolo.com). It should spell out the amount borrowed, when repayment will start, and the interest you will be paid. Yes, you are to collect interest; it's a sign of respect from your borrower.
If you and the potential borrower can't fulfill all these requirements, I don't recommend that you lend them the money. It is not selfish to make choices that protect your financial security; to do otherwise puts you at risk, and no friend or relative would ever wish that on someone they truly love. And if they would, well, they're not much of a friend.
Suze Orman's latest book is her 2009 Action Plan: Keeping Your Money Safe & Sound (Spiegel & Grau).