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Never Loan Money to Your Friends and Family

Personal_Finance / Debt & Loans Mar 30, 2014 - 09:41 PM GMT

By: DailyWealth

Personal_Finance

"Never loan money to your friends. It's a good way to lose your money... and your friend."

A friend of mine owed me a lot of money...

I gave my friend Jack a personal loan a few years ago, as he was starting his own business.


As a financial guy, I take loans seriously. If you borrow, then you owe.

As a moral human being, you pay your debts, both financial and personal. Gotta keep the karma police away. Can't let the scales tip too far away from you.

Jack's business was promising. I was excited for him. But sometimes life doesn't roll the way you think it should.

In time, this debt loomed large over Jack and me. In our relationship, this loan eventually became the elephant in the room.

My brother (an attorney) wrote up the original loan properly, so legally I was protected. My brother filed a "UCC" with the state – in short, legally I could take Jack's assets (his collateral) to cover myself, as part of our loan agreement.

But the assets I could "take" (his patents) weren't really worth anything – to me personally – anyway. Those were just collateral for a loan. I didn't want to use them to start a business like Jack did.

It was clear the loan couldn't be paid. Jack's business hadn't taken off yet.

Jack felt terrible about it. Meanwhile, I really didn't want to collect on my friend – and bankrupt him and take his patents.

What was I supposed to do?

Then I remembered something my grandmother told me a quarter of a century ago...

"Never loan money to your friends. It's a good way to lose your money, and your friend."

I never forgot that. (Well, up until Jack.)

I don't know where she came up with that nugget of wisdom. My grandparents didn't have a lot of money. And she wasn't known for her financial advice.

I assume she heard it from somewhere else... But back then, she said it with such authority, I felt like it came from her. And it sounded right.

I'd forgotten Grandma's advice with this loan to Jack. But now I had a decision to make.

The money was already gone... At this point, the question is: "Am I going to lose a friend, too?"

This week, I remembered Grandma's advice. And I forgave the loan.

I lost the money, but not the friend.

A loan shark – it turns out – I am not.

Then a surprising thing happened... I felt better.

The weight was supposed to be lifted off of my friend...

And it was. His debt was wiped out. Right out of the blue.

But a big burden was lifted off of me too, in a way that I didn't expect.

I didn't realize it, but I had been stressing over this debt too. And I felt like I was stuck in it with Jack.

Now, I am free, too, in some way. And I won't lose a friend. And I don't resent him for not being able to pay. It is simply reality.

My feeling here might not be morally consistent. But I am okay with that. Here's what I'm thinking:

1) I strongly believe morally in paying your debts – in fulfilling your promises.

2) I wiped out my friend's debt with me, breaking his promise to me.

3) Somehow, I feel a lot better.

While I "feel better," this is not something I want to go through again.

Next time, I'll remember this experience. And I'll remember Grandma's advice...

"Never loan money to your friends... It's a good way to lose your money, and your friend."

Don't forget it.

Good investing,

Steve
P.S. Sometimes in life, you may feel like you need to break this rule to really help someone in need. Just realize this going in: Chances are much higher than you think that you'll never see that money again. If you're going to lend the money anyway, do it with your eyes open... Do it knowing that you may never be repaid...

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The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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