We’ve all been strapped for cash at some point in our life and turned to the option of borrowing money at an important time. But what if you are being asked to do the lending? Your friend or loved one needs the money, no doubt, and they are adamant they will pay you back just as soon as they can. So, should you do it?
In short, no. At least, not if you ever want to see that money again. Now, I’m not making a judgement about your friends, I’m just speaking from experience. Too many private loans go unrepaid and quite often, there’s not a darn thing you can do about it.
Let me tell you about a few of the clients I saw when I worked at legal aid who loaned money and how it worked out for them .
Margery’s story of lending money
Margery was an elderly lady in her eighties and confused about her rights. Margery had never been wealthy, she’d had a rough life living in a remote location and hadn’t received much of an education. The most money she’d ever had was when, in her late seventies, she’d won $10,000 in a lottery. Sadly, Margery did not keep her win to herself and no sooner had she received the cash than one of her young relatives, a man named Darren, was knocking at her door. Darren, it seemed, had fallen on hard times. He was out of work and in a mess and begged Margery to borrow her winnings, swearing profusely that he would pay her back. Margery lent him the money, taking his word as promise enough that he would repay his debt.
By the time Margery came to see me, nearly 10 years had passed. She had not really needed the money until now and felt bad about asking for it back but was struggling financially and quietly told me she “really would like that money back”. Margery didn’t know anything much about loans or contracts and it came as a genuine shock to her when I had to explain that statute of limitations had expired and she was out of time to take legal action. While she could certainly demand Darren pay the money back, if he refused, there was nothing she could do.
Dave’s story of lending money
Dave was a young man with a good job and a small investment portfolio. He had a slightly wilder best mate, Brian, who was impecunious but had a hare-brained scheme to get rich quick; he was going to run a music festival. Dave was taken in by the “business idea” and decided to loan Brian the $7,000 to get it off the ground. Being the best of friends, the boys shook on their arrangement and left the formalities at that.
A year passed and Brian’s venture was unsuccessful. It seemed quite a few people had the exact same idea at the same time as Brian and the competition, with their better planning and better funding, muscled him out of the festival business. Dave promised Brian he’d get his money back regardless and so, time went by.
A year and then another year passed and still Dave had not seen a cent. The GFC had taken its toll and he had lost money on the share market. He raised the loan with Brian several times and each time Brian would apologise and promise to repay the debt but of course, nothing would actually happen.
When Dave came to see me, two years had passed and he no longer knew where Brian was living. He had tried to phone Brian many times but the phone was disconnected and a survey of all their mutual friends revealed that Brian had turned to dealing drugs a few months ago and shortly thereafter, disappeared.
I explained to Dave that even if he could find Brian and bring him to justice, he had no hard evidence to prove his case, only his word against Brian’s, and we didn’t know if Brian had any money or not. Was he willing to spend hundreds, maybe thousands, of dollars for a personal investigator to track down Brian and then on the court fees to force repayment, when there was a chance that a) the judge might not believe him, and b) Brian might be broke anyway? Dave weighed this up and decided he did not want to waste any more time or energy on Brian and would cut his losses.
Amy’s story of lending money
Amy was a bright young girl, about 22, who had been living with her boyfriend Sebastian for about a year. Sebastian was a “bad boy” who liked to party and drink, while Amy worked full time as a bank teller and had good savings. Sebastian needed a car for a job prospect and Amy said she would lend him a few thousand dollars, but under no circumstances was it a gift. She wrote a loan contract and had Sebastian sign it, outlining the terms of their arrangement.
Not long after, the relationship ended and Sebastian moved out, taking the car with him and defaulting on the loan almost immediately. Amy demanded Sebastian repay her but he had crashed the car on a big night, written it off and as such, had lost his new job as a DJ.
Amy took Sebastian to court where she represented herself and won her case. The court ordered Sebastian repay Amy in full but he had not done so and Amy came to me, frustrated that she had “won” but was still empty handed.
I explained the process, that she could seek a further order from the court that Sebastian’s property be seized or his wages be garnished, but Sebastian had neither. All Sebastian owned were his personal possessions and his welfare payments, both of which are protected by law. Quite simply, Sebastian was the proverbial stone from which Amy could not get blood.
I advised Amy she had a number of years before the statute of limitations expired and that she might like to wait to see if Sebastian got another job. The risk however, was that he might in the meantime leave town or even the country and she would then lose her chance.
Amy said she would see how she felt and I never saw her again. I’d like to think she got her money back but I suspect she may have moved on. A loan gone wrong is not just money lost but a huge emotional burden and after a year or so of stressing about finance and court, most people would rather just move on with their lives and write the loss off.
The sad reality of lending money to people from your own savings
The sad reality is that people who need to borrow money are usually those least likely to be able to pay it back and if the bank has already turned them down, it’s not exactly a beacon of hope. If you are feeling generous and can afford to give a gift, by all means loan the money. If you get it back it will be a nice surprise.
But if you can’t afford to lose it? Don’t lend it.
*Obviously, all names and details have been changed to protect the individuals privacy*