This is a very tricky situation: Your friend is asking for money—a loan. If you say ‘yes,’ you risk being someone’s ATM. If you say ‘no,’ you might damage your friendship, or lose your friend altogether.
Has this friend asked you for a loan before? Has it been paid back? A loan should be in writing, stating the interest (if any), and have a repayment schedule. Maybe it’s time to be a good friend, and have a candid discussion about budgeting.
- invite your friend for coffee
- ask your friend what the loan is for
- explain the difference between needs and wants
- discuss options
- discuss budgeting
- lose your cool
- be judgmental
- be condescending
- conduct a math class
- pry into personal finances
This is an important and sensitive matter, so choose a neutral place. A neutral place is not in either your or your friend’s home. There are too many distractions in homes. Go to a public place where you can sit undisturbed and have a discussion over a good cup of coffee.
You should know what the loan is for. Who else did your friend ask? Why did your friend ask you for the loan? Is this for a frivolous item or basic needs? What happens if your friend does not get this loan?
The answers to these questions should help you make a decision whether or not to give your friend the loan.
We all want things—but are they necessary? We need to cover our basic needs first, such as food, clothing, and shelter. As we have more discretionary funds we may want to upgrade these needs. No problem there. We all want to improve our status. The problem lies in extending ourselves so far that we end up in debt for things we don’t need. We can alleviate this by stopping when making a purchase and asking yourself, “Do I need it, or do I want it?”
Maybe your friend never thought about options. One such option is delaying the purchase until enough funds have been saved. There is an internal satisfaction that comes with saving for something you want. Shopping for the best price is another option, but do not sacrifice quality for the lowest price. Can this item be rented? Can the item be used by more that one person (in order to share the cost)? These options may change the way your friend approaches the dilemma.
Lots of people cringe at the word ‘budget’. They think they are being restricted or denied things. That is not the case. A budget is not written in stone. It is flexible. It is a tool that shows you how you are doing financially. Everyone should make necessary adjustments to the budget as life situations change. You are flying blind not knowing how much money you have to work with and where it’s going—that’s the purpose of a budget. You can do a manual budget or use a software like QuickBooksTM . Whichever you decide to use, create a budget today.
The last thing you want is to get angry or in a shouting match. That is why it is preferable to meet in a neutral place for your conversation. Nothing can be accomplished by becoming agitated, especially when there are other people around.
Make it known that you are not making judgments about the use of the loan. You are having this conversation to see how your friend can use alternatives to loans.
Most people have had times where some extra money was needed. And when that need is there, people often resolve it by asking a friend or family member for financial help. There’s no need to hold it over them and make them feel small for being in a tight financial situation—especially if it’s a legitimate need.
Keep it simple. The objective is to encourage the concepts of saving and budgeting. Henri Amiel, a 19th century Swiss philosopher, once said, “To know how to suggest is the great art of teaching.” Hopefully you can be a successful teacher to your friend.
You are not their accountant, just a trusted friend. Suggest that they speak to an accountant or financial advisor to design a simplified budget. Setting up a budget and assessing finances with a professional is much easier on people than doing so with a friend or family member.
Being one’s ATM doesn’t help either you or your friend. Being an ATM decreases your asset (cash), while your friend’s liability increases. There is an old adage that goes something like this: give a person a fish and they are fed, but teach a person to fish and they can feed themselves for life. The hope is that you can offer your friend suggestions about money and budgeting that will help the situation today and for the future—and still maintain your friendship.