I was surprised at the number of doctors who had lent money to their friends and relatives and lost both the loan and that friend! At least in the Indian context it is common to find friends and relatives wanting to borrow money from you. How can you – whether you are a doctor or not – handle the situation?
Certain conditions about YOURSELF: You need to ask these questions about yourself:
- Can I afford to give the loan?: When you are a doctor earning say Rs. 300,000 a month and somebody approaches you for a Rs. 5000 loan, there is a good chance that you can afford it. However if you are earning only 50k a month and your sibling approaches you for a Rs. 300,000 loan, you may have serious issues.
- Is it fair on YOU: By giving a loan how much of your own goals are being sacrificed or postponed? Are you willing to give up your goals or your children’s goals?
- Does your spouse agree that the loan should be given? Remember you may be the SOLE breadwinner, but your spouse and you have joint dreams. So you need your spouse’s buy in.
- How will you feel if you did not get back the money? Personally I would shred that person to a million pieces – I do not need help to lose money, I can do it myself, dammit.
- Are you a strong person: Can you say No without feeling guilty? If not, you need to learn this soon.
Certain conditions about the person asking the loan:
- There is an inner circle: What would you do if the person asking for the loan is a parent? or an adult kid? Very difficult to say no. How will you deal with a ‘best friend’ or a sibling? You and your spouse have to answer this question for your self, preferably before your wedding!
- Is the person so close that you are worried about hurting the relationship?
- Has the person been trustworthy in the past?
- How long have you known this person and how fond are you?
- Do you THINK that he/she is asking for a reason that YOU find justified?
- Do you THINK he/she is genuinely in need for that loan?
Process of how to give the loan:
- Once you decide to give the loan it is preferable that you should put the whole agreement in writing.
- Putting it down on a stamp paper itself might seem too daunting for the borrower and may pare down the amount
- Blame it on your CA / significant half saying that we both need to understand how the whole thing will work. It is also useful from the Income tax point of view.
Let’s get practical. A friend or a client is in trouble and approaches you for a Rs. 400,000 loan repayable in one shot in about 90 days time. Your spouse has serious misgivings about the loan coming back in time. It is your friend and YOU are sure that he is wanting that loan to pay for his daughter’s college fees – and he is short by Rs. 4L.
My advice? Give a gift instead of a loan. Give a significantly smaller amount but with no expectation of it coming back. Tell him all your money is stuck in ‘Goal Based Investing’ and you CANNOT remove money from the ‘commitment’ of the family Goals.
See if you can give the loan in installments, or give a significantly smaller amount. See if you can involve some other friends /relatives so that the amount is small for each one of you and the BORROWER finds it difficult to face all of you in a group.
If you must give, it is your SPOUSE who should deal with the whole transaction. She should not come back and say “see I told you and the money is gone”. She should do the documentation, sign the cheque and accept the responsibility or gently (or rudely) reminding the borrower.
Best is to remember: “Never a lender or borrower be – for the loan normally loses itself and the friend”.
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