Many of us may have come across this situation, when times are still tough and someone we know is struggling to make ends meet, after a job loss or salary cut.
If you are secure in your job, fiscally prudent and financially well-off, you might get a call or an email for monetary help from a close friend or relative. In fact, on many occasions, it could even be a distant relative out of the blue from back home, or a long-lost friend or a friend of someone you know.
If the loan requested was small and you wouldn't care if it was returned or not and, above all, the relationship really close, you might not think twice to help.
But it could get complicated if the sum is big, and that holds true for even someone who is close, whether friend or relative.
"There is a saying ‘A friend in need is a friend indeed,' which as a joke changes to ‘A friend in need is a real nuisance,'" says Gurnos Stonuary, headof business services at Nexus Insurance Brokers, Dubai.
It gets even harder if the person asking for help is not someone you know very well or haven't been in touch with for many years, but where the reason is something you feel compassionate about — a medical emergency, or where your help could keep someone out of an interminable stay in prison.
Money tests friendships and even the closest of relationships, and so emotions play a big part in how one tackles the situation.
"Above all, the emotions of the loan come into play," Stonuary says. "Do you want to upset a relative or friend by refusing, do you want to see them suffer when you have the answer to their problems — if only in the short term."
So, your stance could define your future relationship with that person — if you help, the bonds could strengthen, though you are unsure how soon it would be before the borrowed money is returned. If you don't, it could mean slowly moving away from you and the beginning of the end of the relationship.
Of course, things get sticky not when you've lent the money, but later when you are kept waiting for it to be repaid.
Jokes apart, Stonuary says, if one has to lend money to a friend or a relative, you only do so if you are prepared for the money not to be paid back.
"Should you ever have to enforce the return of a loan you can lose the friendship of the person you lent to," he observes.
Another angle, Stonuary says, is that a friend who borrows money from you and then does not pay it back could very well believe you don't need it.
Psychologists acknowledge the emotions involved in such scenarios, and, at the end of the day, it's naturally the person's own decision to help or not depending on the closeness.
"If it's a devoted family or a true friend, the inclination is to help a loved one in need of money," says Ron Villejo, a clinical psychologist based in Abu Dhabi. "So I am sure there are many of them who won't hesitate to lend money to another family member or friend, and this is a personal decision that we shouldn't judge."
One has to be careful, psychologically speaking.
"In general, though, I would caution against lending or borrowing in such a context. Money is such a sensitive, even awkward, matter for many people that they do not always talk reasonably or openly about it. So they may be prone, psychologically, to making unwise judgments or irrational decisions in this regard. This very proneness should act as a signal not to lend or borrow in such a context," Villejo elaborates.
Legal safeguards
It is down to the lender to decide if the friendship bond or family tie is enough or if a more formal arrangement is required. Mark Nierada, solicitor at Nexus Insurance Brokers, provides some legal protection tips:
1. It's always a good idea to have something in writing, even if its an exchange of emails, to confirm the amount, the fact its a loan (not a gift) and when the money should be repaid. That would stand as evidence of the arrangement.
2. At the next level, the parties could sign a promissory note (IOU) which would be recommended if the amount is too significant to write off and the lender would want to enforce the loan if there was a default. By enforcement I mean a civil action in the civil courts to obtain a court order that would ultimately allow seizure of the debtor's assets. That would be a rather costly and time consuming procedure.
3. A lender could further protect themselves by requiring the borrower to provide a security cheque drawn on a local bank for the amount owed and dated on the agreed re-payment date. The lender could present the cheque and if it bounced could file a police complaint and obtain a travel ban.
Better safe than sorry
As there's no one clear cut advice for all who lend money to friends and family, Gulf News asked Steve Gregory, technical services director at Holborn Assets Insurance Brokers, Dubai, to give specific advice to different case studies.
Q My colleague, who is a good friend, is back from a vacation and is suddenly faced with some cash flow problem. His rent is due in two days. He comes and asks me for a loan. He says, once he gets his salary he will pay back. He also says he has a couple of term deposits but he doesn't want to encash them. What should I do?
Gregory: Take the term deposit papers as security if you want to lend to him. And anything else he can offer that becomes yours if he does not repay you on time.
Q If it is a colleague in office who is asking for a loan say of Dh1,000 to pay some of his debts, what should I do? What questions should I ask him before I give him a loan? I do not know him that well, except interaction on work-related issues.
Gregory: A letter from him asking your employer to deduct that amount from his salary and pay it to you should be enough to ensure you get repayment on a specific date, it you want to lend to the colleague
Q There is a friend who often takes a loan from me but always small amounts — never more than Dh500. He has always paid back on time. I have never felt the need to ask him why he needs such loans. This time, however, he wants a loan of Dh5,000 and says he needs it for buying a motorbike that would help him in his sales job. He promises he will pay Dh500 every month. I can spare that money, but that's a lot of money, isn't it?
Gregory: Buy the bike in your own name so you can take it away from him if he defaults. If you are going to be his bank, you need your security. Change ownership to him once he has repaid in full.
Q What do I do if a very close friend calls me up and says he is in deep financial trouble (after having lost a job). He tells me that if he is not able to pay off his debt of Dh30,000 to the banks, the courts will probably decide against him and sentence him to prison. I really want to help him. If I have to give him a loan that would mean giving away almost half of what I have saved. If I give him just Dh10,000 it won't save him.
Gregory: You must be crazy to consider lending that amount to someone who already cannot repay his debts. If he has no assets you can control to cover the proposed loan, don't make it to him.
Q If it is my closest friend and he asks for a loan of about Dh10,000 because he has maxed out on his credit cards and his emergency savings and has to send immediately money back home in India for his father's emergency surgery — what do I do? I know his parents well and so, what do I do?
Gregory: If you are willing to gift the money out of your love for that family, then feel free to lend it to them. But take your friend's credit card or passport or a cheque as security if you think he won't repay on time.
Q Three months back my son-in-law, lost a job, from which he was earning Dh12,000. Our daughter works in a school earning Dh3,000. They are now running out of their emergency funds and asks for our help. We are still working but wouldn't be in a position to dole out money as we have a son in college and also putting away money for retirement. And our daughter says they might have to give up their rented accommodation and join us in our two-bedroom apartment until he again finds a job.
Gregory: Help him find a job. It's work he needs, not a loan. Pay for a good suit for an interview and build his morale and confidence. Welcome them into your home for a while. Share a family budget, and offer to pay him for doing something in return for you. Lend him the car to go to interviews and make him feel good about himself. Be encouraging. Everyone gets a new job in time, and next it might be you who loses your job!
Q A former girlfriend who is now married calls me up and says she needs Dh5,000 to pay for her mother's illness. She knows I am still single and doing well in my job without any financial obligations. Why should I care?
Gregory: Hmmmm. Just say "It's not convenient for me to do that", and don't feel you have to give a reason. You don't.
