What Do You Do If A Friend Or Family Member Asks For A Loan?

by Tax Guy - Burlington Accountant on September 24, 2009 Print This Post Print This Post

What would you do if a close family member or friend approached you and ask for a loan or for you to co-sign a loan?

A friend called me the other day asking what to do: Someone had asked for help in the form of a co-signed loan. Apparently, this person had run into some financial difficulty and needed a loan to pay the storage company to get his stuff back.

My friend had no idea how to respond.

If the Bank Won’t Lend Why Should You?

Ding-Ding-Ding! That’s the sound of a warning alarm.

Can’t get loan on his own … Can’t get his stuff out of storage because he could not pay the bill.

If this person cannot pay the storage bill, how will they make loan payments?

Banks have lending down to a science. They know who is good with money and who is not: Nine-times-out-of-ten, they are right. Banks may take on a loan where the person may not have the best credit history, but that person will certainly pay more interest.

Banks are also making an investment in the loan. They want to ensure they get a return on that investment by doing dome diligence on the borrower and avoiding potentially bad investments.

Banks have diversified loan portfolios. They lend to many people at the same time and the loss from a single default is reduced because of the many other’s who continue to pay.

What Do You Get Out Of the Deal?

Certainly, by co-signing or guaranteeing a loan you are assuming risk. If the person defaults on the loan, you will be forced to assume the payments or settle the debt. If this person cannot get a bank loan, then the risk of default is already high.

When you take on risk, you should be compensated for it. You will not be paid for co-signing or guaranteeing, but you might be out of pocket if the person defaults on the loan.

I was reading about another situation recently where someone had guaranteed a large loan for a family member and put their house up as collateral. This close family member failed to make payments shortly after the loan was advanced and now this person may have to sell their home to satisfy the debt.

What To Do If Someone Asks For A Loan Or Guarantee?

First, ask yourself if this person is really your friend. Personally, I do not lend money to anyone and if someone were to ask me for a loan, I would be seriously put off.

Second, be direct and honest. Tell them you do not lend money to friends. There is no need to justify yourself.

Finally, offer other support or help. You might not lend or guarantee a loan, but you might be able to find another lender for them or, put them in touch with a consumer credit counsellor.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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