How To

10 Rules for Lending Money

Written by Mint.com
Published Mar 26, 2012
4 min read
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If someone asks you to lend them money, think before you act. As much as you may want to help out a friend or family member in need, there are several rules you should follow before you hand over any cash.

Financial expert Suze Orman lays out her 10 rules for lending money — rules she says must never be altered. They will help you determine if you are in a position to lend or give money, and if so, how to go about doing it.

“Live by [these] rules and one day you will be happy that you did,” she said.

1. Have No Credit Card Debt

Never, ever, lend or give money to anyone if you owe money or your credit card. “If you have credit card debt, you need money,” Suze said. “You don’t have the money to give to somebody else.”

2. Have an 8-Month Emergency Fund

It’s important to have an 8-month emergency fund before parting with your money. “Possibly, people are asking you for money because they didn’t have enough of an emergency fund. They got into trouble,” Suze said. “And if you don’t have at least an 8-month emergency fund, you don’t have the money to lend.”

3. Fully Fund Your Retirement

Even if you feel like you may have a little extra cash right now doesn’t necessarily mean you can afford to lend someone money.

“There will come a day, trust me, where you are going to have to live off of your retirement plan,” Suze said. “It’s what gives money to you when you no longer have a paycheck coming in.”

Therefore, make sure you are fully funding your retirement account before you decide to give someone a loan.

4. You Can Easily Pay Your Mortgage/Rent

Before making a loan, make sure you have plenty of money to pay your rent or mortgage. “If you are struggling with everything else, funding the 8-month emergency fund, funding your retirement, doing all these things…. and you are struggling to pay your mortgage or your rent payment, you do not have extra money to give to somebody else,” Suze said.

5. Your Job Must Be Secure

“You need to know that you are not going to get fired, or that you have a secure clientele if you are self-employed, so that you can continue to generate money. If you don’t have a job, you’d be surprised at how fast you go through your money,” Suze Said. “Then you’ll be the one looking for a loan.”

6. Have Adequate Insurance

Your assets, like your car and your home, must be protected by insurance. You must also have adequate health insurance and term life insurance that protects you and your family. These things have to be in place before you have “extra money” to lend or give someone.

7. Fund Children’s 529 Plan

If you have children and want to pay for them to go to college, you should have a 529 college savings plan. Make sure you are funding that plan before lending anyone money.

8. Give Money Instead of Lending Money

The biggest mistake people make when lending money is expecting to get paid back. “Chances are if [somebody] needs money today, they may need money tomorrow,” Suze said. “They will not have the money, ever, to pay you back.”

That’s why, if you’ve met all of Suze’s prior rules, she suggests giving the money to someone without the expectation that you will get paid back. This eliminates any bad feelings – the person accepting the money won’t feel bad about not being able to pay the money back, and the person loaning the money won’t be upset about not being repaid.

9. Watch the Loan Amount

If you decide to lend the money instead of giving it away, be careful about the amount you decide to loan. “Make sure you can afford not to be repaid in the event that you are not paid back,” Suze said.

10. Get a Promissory Note

A promissory note should lay out in writing how much was lent, the interest to be paid and when the loan is due in full. Both parties should sign it and keep copies. If you are not paid back, you can write it off as bad debt on your income taxes. Once you do that, the person you lent to will be taxed on that money.

“10 Rules for Lending Money” was provided by CNBC.com.