Traditional personal finance advisors say you should never loan money to friends or family members, right?
Count me in as a fully tenured professor in that School of Thought.
What if you decide to ignore the advice and become a lender?
Sometimes it’s OK to loan money
That’s OK. It’s your money. Do whatever you want.
Here’s one way to protect yourself from losing.
My pal Peter loaned $1,200 to a co-worker. Peter was smart enough to demand collateral in exchange for the loan, rather than an IOU written on a scrap of paper. The borrower gave him a fancy gold ring. Peter didn’t know whether it was worth $1,200 or more or a lot less. He figured that if he got at least something of value, it would increase his chances that the guy would pay him back.
Once Peter knew his $1,200 was gone for good, he gave the ring to his girlfriend.
Check the collateral first
She wasn’t too impressed. It was a cheap, fake gold ring. Not even her size. And she was expecting an engagement ring. Peter lost her, too.
Lesson? Next time, get better collateral. Or don’t loan money.
Would you loan money to a friend? What type of collateral would you ask them for?
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Image © iStock.com/Shevchuk Boris