As banks and governments around the world are de-leveraging, Canadians might be faced with a requests for a personal loan from friends and family.
If you’re a young Canadian you might be asking, or perhaps expecting, money for school, a wedding, or a down payments on a house. Sometimes these are loans. Sometimes these are gifts. And sometimes these are loans that messily end up becoming gifts.
But youth are not alone. Just last week, a survey commissioned by the Certified General Accountants Association of Canada showed that almost a third of Canadian households are living paycheque to paycheque.
My personal rule is that I don’t lend money that I couldn’t afford to live without because there is a chance that I could lose my friend and my money. On the few occasions that I have made personal loans, I’ve received every penny back. I’ve never set terms or used one of those websites that formalizes personal lending between friends - like WikiLoan and lendfriend - because I’ve never been asked for more than a few hundred bucks.
I haven’t cared about timelines, either. The friends who needed the money might suggest full repayment within a few months, but since I assume it’s lost money, I don’t pester them for updates. My thinking is: When good friends need help, you help them if you can. If they eventually pay you back, great. If they don’t, you avoid the awkwardness of seeing them because they make themselves scarce.
But say a good friend needed a lot of money. I would never write a cheque to a friend for $90,000 as a loan, let alone as a gift. But the day might come when someone asks for more money than I feel comfortable writing off in case things go bad.
When significant sums of money are in question, you have to take a page out of the professionals’ playbooks.
It might be strange to ask a friend for their credit report, but it’s fair game in my opinion. People in the business of lending money do it, and if your friends and family can’t get money from a traditional lender you already know it’s a high risk proposition.
Ditto with collateral. A secured loan is less risky for the lender than an unsecured loan so see if you can have your friend pledge something of value that perhaps you can use and enjoy during the term of the loan. Worst comes to worse, you both have to understand that selling the collateral to cover your losses is not just lip service. It needs to be made clear that it could happen.
You might not need a lawyer, but certainly having both parties agree to payment schedules, the interest being charged, and protocols for handling late payments should be made in writing, signed by the borrower and the lender and a third party witness.
And just like a traditional lender, you should be prepared to say no if you judge the risks to your money to be too high. Unlike a traditional lender, you’ve got much more at stake than just money.
Preet Banerjee, a personal finance expert, is the host of Million Dollar Neighbourhood on The Oprah Winfrey Network. You can read his blog at WhereDoesAllMyMoneyGo.com and follow him on Twitter at @preetbanerjee.