Wall Street Veteran: Why I Don’t Lend to Family and Friends
Personal_Finance / Debt & Loans Nov 10, 2018 - 05:16 PM GMTBy: Jared_Dillian
Once in a while, friends or family want to borrow money. How should you handle this?
Be careful.
Over the years, a hundred people asked me to borrow money from fifty bucks to tens of thousands. I have granted only two requests.
A lot of ill feelings will come up over borrowed money that isn’t paid back. It destroys relationships. Happens all the time.
The Answer Is No
The answer to the question “Can I borrow money?” should pretty much always be no. There are a couple of situations in which the answer is yes.
- The amount is small enough that non-repayment would not change the relationship.
That number will vary from person to person.
Some people will not miss a couple of thousand bucks. Some people will get p----d over getting stiffed on fifty. Totally depends.
Here is the key: If you loan money to a friend or a family member, you should write it to zero right away.
You should assume you will not be repaid. You should assume the loan is a gift. You should assume you will never see that money again.
If you are okay with never seeing the money again—I mean really deep down, you won’t miss it, and you are 100% certain it won’t change the relationship—then go ahead and do it.
This is the primary reason I never loan money. Not because I am a saver, but because it inevitably destroys relationships.
And here’s the thing: Even if I’m not weird about it, the borrower might be weird about it. He will be weird about it if he can’t pay you back. He will avoid you like the plague.
So in general, never do it.
But every rule is meant to be broken. And if you do it:
- Charge interest.
Charge a lot of interest. This person is asking to borrow money because he has exhausted all other options. Bank account is empty. Credit cards are maxed out. He has turned over every rock and you are his last resort.
Jack him up. Charge him 100% annual interest or more.
First, it’s common sense.
If commercial lenders think he’s a bad credit risk, then he deserves higher interest rates. Payday lenders and title lenders often charge triple-digit interest rates. You should do the same.
If you’re doing something really stupid, you might as well make some money doing it.
If credit is not available, then the price of it doesn’t really matter.
Are you morally hesitant to charge interest to friends and family? This is America. We believe in the time value of money here. Don’t be medieval.
The general principle here is:
a. Assume it’s a gift.
b. But pretend that it’s not.
If You Get Stiffed
The time to get paid back has come and gone, but you never got your money. How do you handle it? Do you blow up the guy’s phone? Hire a private investigator?
You can bet your ass he knows he owes you money. He knows where to find you.
Let it go.
If you had followed step one, you already would have written it to zero. So there would be no need to release the hounds.
But even if you write it to zero, you both know there is a debt outstanding.
In fact, I have an easier time loaning out large amounts of money than small amounts of money. I have no time for the guys who want to bum fifty bucks off you and then “forget.” Oh geez, it slipped my mind.
That brings us to rule number three. It is also a general life principle of mine.
- There is no charity—only investment.
A few weeks ago, I talked about giving to charity. Even though I give to charity, I don’t really believe that I’m giving to charity. I believe that I am investing.
When you give to charity, you expect nothing in return. When you invest, you expect something in return.
That something might be a psychic reward. In my case, that was the thought that I saved the lives of a few cats. That is an investment.
Or seeing your down-on-his-luck friend recover from his bad luck and have a fulfilling life. Also an investment. Deep down, I think you know the difference between charity and investment.
So I don’t give. I invest.
Which is the primary reason I’m 2-for-100 on lending money. I don’t believe many people are very good investments. If someone is a good investment, he’ll show you his virtues, not flaws.
He’ll say, “You should invest in me because I’m great and you’ll get your money back.” Not, “I’m down on my luck and I’m a loser.”
Pretend you are a capitalist (which you are). Invest in this guy.
Where most people typically go wrong is that they loan money when in reality it is charity. And then they expect something in return. That’s where the resentment comes in.
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