Say 'No' When Family and Friends Borrow Money

Aneth Ng-Lim

Posted at Nov 26 2018 08:50 AM | Updated as of Nov 27 2018 01:15 PM

Families gather around a Christmas display at a casino resort in Manila. Jonathan Cellona, ABS-CBN News/File

MANILA -- Can you imagine parents suing their children for not paying back loans? That couldn’t have been an easy decision to make, and as a parent myself, I wouldn’t want to go down that road. Sadly, some parents in Australia and New Zealand had to resort to this painful step to recover their retirement savings.

In the case of Australian Lalanah Brujah, she sued her eldest son Taras Wolf who borrowed nearly A$300,000 (about P11 million) so he can buy a house. She expected to be paid in 5 to 7 years but did not document their discussion, trusting her son to honor the agreement. But according to court records, Wolf sold that house in just 18 months and then bought and renovated a luxurious five-bedroom property. He also insisted the loan was not a loan, but a gift from his mother.

There’s also Trevor and Marian Warin, a New Zealander couple, who took their daughter Colleen to court for unpaid loans of NZ$368,000 (around P13 million). They too did not have any written contract and all their demands to be paid from 2012, including an offer of a very reasonable NZ$500 (or P17,700) repayments monthly, were ignored. They finally decided to file a lawsuit four years later but Colleen countered saying the agreement was she would pay back the loans only when able. But then her mother disclosed that jobless Colleen bought an expensive car and property on Waiheke Island.

Fortunately for Brujah and the Warins, the courts ordered their children to pay up the loans plus interest and legal fees. But can a parent truly call that a victory when their relationship with their children have suffered what maybe irreparable damage?

There are many lessons to be learned in their stories, as well as countless others that did not end up in court. While it can be very hard to say no when family or friends come to you for a loan, you may be doing them and yourself a favor by simply saying no.

It’s natural to want to help family and friends when they find themselves short of cash. Maybe the reasons are urgent like a medical bill. Or the money will pay for something important like tuition. There are a host of money emergencies from needing to pay electricity bills, to house rent, even meeting obligations to a loan shark.

Sadly, I have heard them all and have said yes when I should have said no. Nine out of 10, I regretted saying yes for at least two reasons: one, I never saw the money again; and two, I did not get the thanks I deserved.

When it comes to borrowing money, it seems there are peak seasons too just like with travel. You are likely to receive more requests around February as people struggle to pay bills from their overspending during the holiday season (Of course you want to help save them from paying late and interest charges on their credit cards). here can also be occasional requests in April and May to fund vacations so they can visit loved ones in provinces or even abroad (Who can say no to making family reunions happen?). June is another peak as school fees become due and a host of school-related expenses arise (Education should be a right, not a privilege so if you can help, why not?). Finally, we have December, as the holiday season requires spending from gifts to meals during get-togethers (and everyone deserves to have a Happy Christmas and a Merry New Year).

But while your reasons for helping are all good and valid, there are other ways to help that can make the borrower more responsible when it comes to managing money. Maybe they need to feel the pinch from paying interest and fees on their credit card so they will not overspend again. Or save money starting this year so they can take the family reunion trip next year. How about a forced savings plan for school expenses so they will not approach June with dread? And maybe a simpler holiday celebration sans gift is a better idea for their near-empty wallet.

Next time you get asked for a loan, consider these as you say no, or if you have to say yes.

#1 Turn down the request for a loan, instead give what amount you can and preserve the relationship. Say you are approached to help with a medical emergency. The bill may be P100,000 and you know they plan to approach several others. While you can afford to give a loan, you cannot afford not being paid back. A good compromise would be to hand over a smaller amount that you would not mind not seeing again. The thing with medical emergencies – bills tend to pile up, especially if recovery will take a while. If they are borrowing just to pay the hospital cost, it will take some time before their wallet recovers too. Spare yourself the problem of how you can collect the loan when they will be facing a difficult time.

#2 Document the loan for you and the borrower to remember. Yes, we trust family and friends, but sometimes what you remember is not what they remember. Maybe you know you lent them P20,000 but what if they remember it to be half the amount? Or worse, that they have paid you back? A simple IOU note is better than none, or you can ask for a dated check for the loan amount, so that you can also settle the issue of when you will see your money again.

#3 A signed contract with detailed terms is even better. If the amount is substantial, as was the case with Brujah and the Warins, a loan agreement would be more prudent. Loans to family often end up being open ended since terms are not set and made verbally. It is best to execute a contract that will cover repayment term and payment schedule, an interest rate (if you agree to one), and other contingencies, such as how late payments or a default will be handled. You can approach a lawyer for this, or check out online sites that offer free templates like EForms https://eforms.com/loan-agreement/family/ and Rocket Lawyer https://www.rocketlawyer.com/form/loan-agreement.rl#/ as a starting point.

#4 Agree on zero gossip. One more thing you can discuss is confidentiality. If you hand over cash, the last thing you want is for others to know, and possibly borrow from you. By asking for confidentiality, you can also respect the privacy of the borrower. You both want to come out of this without gossip and drama, so keep it on a need to know basis. But remember #2 and #3 because a document or a signed agreement will protect you. If you don’t have #2 and #3, and also followed #4, you may not see your money again!

#5 Counsel your family and friends on formal loan sources. With the market’s low interest rates, loans are not so expensive these days so why not point them in another direction? They can get personal loans, or loans with collateral (and enjoy lower interest). With stiff competition, banks and other financial companies also assure fast release of loan proceeds. Maybe you can help them with preparing the documents – but not as guarantor – as not everyone likes to handle red tape. And if you can afford to, still give a small cash assistance to help tide them over until the loan is released.

There is no easy way to handle money and sensitive relationships so it is really best not to complicate the latter by adding in the former. For all your good intentions, you might hurt rather than help a friend or a family member. You could lose your money and your relationship in one shot so tread very very carefully.