There are some easy steps for a loan to end a personal relationship:
- Lend money to someone who will never be able to afford to pay you back
- Make sure nothing is written down and signed
- Be unclear on all of the loans terms and payback
- Make sure there is no collateral for the loan
- Lend the money in cash so even the existence of a loan cannot be proven
- Do not use a formal promissory note template to cover all the loan terms
- Ignore IRS rules on interest and 1099-Int forms and get penalized during an audit
Any of these steps will lead to disappointment, strain, and most likely, the end of the relationship.
When a family member or friend asks me for a loan, I either give them the money as a gift or decline altogether. Of course, it must be an amount to give that is affordable to me. This is my personal rule that I follow after having tried every other way about loaning money to friends and family. In order to explain, I’ll just make a few generalizations from my personal experience that I’ve learned over the years.
- I am never repaid so why even pretend it’s a loan in the first place?
- If they had income or credit, they wouldn’t be asking me for a loan.
- If they had the time to get money from a professional lender, they would have done so.
- If the requests for loans are never ending, that will become clear and you can start saying, “No.”
- If you know the money will be used to continue someone’s downward spiral, you can always say, “No.”
Every person and situation is different, so you have to use your best judgment for the circumstances. But I stick with my rule of either gifting the money or declining altogether.