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  • Loans to family and friends: Don't let Judge Judy rule on your personal budget.

    by:
    Laurie Campbell

    TV’s Judge Judy knows about using a budget calculator and tracking spending. Not only does she earn millions a year, in her “peoples court” she deals everyday with financial issues. Many of them have to do with unpaid personal loans between friends and family that have ruined relationships and ended in vicious legal battles. I don’t make a habit of watching Judge Judy. But when channel surfing I occasionally catch glimpses of her show, witnessing the likes of the uncle who’s suing his nephew over an unpaid car loan, or the career girl who’s suing her former unemployed boyfriend for unfulfilled promises to pay his share of the rent. On and on the conflicts go, sadly between what ought to be friendly and loving folks. It’s got me thinking about the pitfalls of loans between close parties and what personal financial decision-making can be applied to avoid bad outcomes. Firstly, some claim that a no-go policy is the best option regarding personal loans to friends or family. Have you used the best budget calculator? Then protect that personal budget in a merciless way, they say. Don’t provide loans to others ever because  - especially in close quarters - money makes people act irrationally and emotions get in the way of sound financial judgment. One minute a live-in couple is all smiles and warmth about a loan between them, and the next moment insults about cheapskates and deadbeats are being hurled through the air, along with ashtrays. And just about the time the argument degenerates to issues involving sexual habits and abilities, visions materialize of Judge Judy snarling, “Oh, grow up!” Maybe we should stop to consider the cold-hearted approach. I’d say a no-go policy might apply to financial situations that do not qualify as emergencies. In particular, this would apply to the serial borrower who - with a track record of constantly hitting up others for small loans – perhaps needs some tough love for encouragement to get his financial act together. But realistically for most of us, it’s hard to deny friends and family financial help in times of real budget trouble, but that’s provided the giver is in a good place financially to make the loan. Let’s explore how the smart personal money manager might approach the situation. There is wisdom in the notion that you should never provide a personal loan you cannot afford to write off. In other words, you make the loan with the understanding that it could well end up being a gift, and you are fully prepared to accept that outcome with forgiveness and no hard feelings. On the other hand, if the loan is a significant sum that simply needs to be paid back, then your best bet is to approach matters in a businesslike way. Meanwhile, if you can’t afford to make the loan, don’t make it. Perhaps try to help the friend or family member find alternative solutions to the money problem. In taking a businesslike approach, remember that – as Judge Judy so often points out – oral contracts are not legally binding. Talk is cheap. Moreover, oral contracts do not receive the respect that written contracts afford. Therefore, it’s a good idea to put your personal loan agreement in writing. Note the amount of the loan and all terms including timelines for payback by instalments or through a lump sum. Also, identify the amount of interest that might apply to the loan or whether the interest is waived (you can use the online calculator at Bankrate.com to create a loan schedule). Finally, get both signatures on the contract as well as the signature of a third party witness. If you get groans for any of this from the person you are aiding, just lay down the law as Judge Judy would - no written agreement, no money. Now, helping out a friend or family member may involve official money business where you are asked to cosign for, say, a bank loan or a car loan. Just remember that as a cosigner you are legally bound to honour the debt if something goes wrong. That is why it is so important to consider loans to others from every angle. How, for example, would $10,000 owing on a car affect your personal budget today or at some point in the future? No less a consideration, how would the unexpected bill affect your relationship with the friend or family member you are helping out? Should problems with a loan arise, deal with them immediately and in a forthright way. You can be empathetic with a friend or family member, but at the same time you ought to be firm. Don’t let emotions – or emotional entreaties - distract you from the business at hand. Particularly if the loan problem threatens you financially, you must stand your ground. Alternatively, explore ways to resolve the problem, which may involve re-negotiating the terms of your written loan agreement. In the end, look at it this way: watching Judge Judy on TV might be engaging, but appearing before her as a claimant is not recommended.

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