Lending money to friends, family, and strangers is a tricky situation. I’ve argued why you should never ask to borrow money from friends or family. If you do, not only would you sully your honor, you will disappoint your parents, and potentially lose your friends.
If you do end up borrowing money from friends and family, my assumption is that as a Financial Samurai, just like a Lannister, you will always pay your debt back in full.
But this is the wrong assumption because some people simply have no honor. They are the takers in this world who mainly think about themselves.
If everybody honored their debt obligations, there would likely never be a financial crisis that destroys the wealth of millions. However, as we all know, crazy things happen all the time.
Bad lending outcomes is one of the main reasons why I rank P2P lending as the worst passive income investment.
I’d like to share several sad stories from Financial Samurai readers who lent money in good faith. Neither of their stories ended well. However, there are some great lessons.
Sad Stories About Lending Money In Good Faith
The Good Uncle And Brother
“Lending money to family and friends is a terrible idea. In most cases, you will lose both: the money and the friends.
I lent about $10,000 interest-free to my nephew 12 years ago. Never saw a dime of it back. Not only that but he totally avoids me and I haven’t seen him in three years. He works and makes good money now. He is also very thrifty, but it’s just too hard for him to pay the money back.
Then I lent about $160,000 interest-free to my sister to buy a house as she could not get a mortgage. She was supposed to get a mortgage within three years and pay me back. Nine years later she has only paid back $40,000.
Now she never comes to see me and hasn’t talked to me for the last two years. She makes good money with her husband as they take a lot of vacations. But it looks like it is hard for her to pay the money back.
I didn’t do any loan paperwork with them – just wrote a check and made a gentleman’s agreement. That is the only evidence I have and they know me. I am not the type that would take my family members to court so I guess I will never see my money back at this point.
The worst thing is that I loved them so much and now I never see either of them. My heart has gone cold. So I realize at this juncture, I lost both, money and family.”
The Benevolent LandLord
“I “lent” money to a tenant who was neither a friend nor family. The guy was younger. I believe around 23 years old. He had moved from somewhere south up to the Washington DC area. He was under a manager training program contract with his work and I believe he was mis-informed of his potential compensation.
When I had checked him out in the application period he seemed fine enough, and the rent required wasn’t all that much. He was going to be paying around $950/month for one bedroom in a shared unit. He had his first months rent and a security deposit so things were off to a good to start.
The unit was a 2-bedroom, in which he was splitting with an existing tenant that was paying two-thirds of the total rent as she had a much larger space.
Anyway, it started out well and the money was coming in as usual for the first three months. Then on month four, I received only one check from the female tenant. So I sent an email to them to see what had happened, and he said he would get it to me.
He said he just didn’t get paid that day and the check to his account was delayed. I said okay, just get it by mid-next week, assuming it would take a couple days for the bank transfer to workout. A couple days came and went, and still no money.
I reached out again, and he said he was going to send the money next week. He got into a car accident and needed to sort that out. I realized this wasn’t my problem, but I felt bad for the guy, and said, “Okay, just get me the money next week.” That week came and went as well… still no money.
We then approached the next month and again I received a check from the female – only. So now I was down $950 x 2. $1900 isn’t exactly life-changing but it’s not small change either.
So I reached out to him again, and said, “You have missed rent from last month and this month is due as well. You are down $1,900 what is happening?”
He responded that he was going to be getting a promotion as he was finishing his program but it hadn’t hit yet. As soon as it did he would pay the money. The reason he hadn’t settled up yet was because his 3-year-old son was sick and needed treatment. He also needed a new bed. I didn’t know he had a son. It wasn’t my business I suppose.
So, I said, “Okay, I need you to start making payments on this or we are going to have to start the eviction process. I don’t want to kick you out, but I can’t take another $950 hit.”
Would you believe it? He missed another check. I’m now down $950 x 3 = $2,850. This was the last straw. It should have been earlier but I was being nice I suppose.
I had a discussion with the guy and discovered the issue. Not only did he have child support due in addition to another sick kid and a totaled car, he was also fired from his job for lack of performance. So much for that promotion.
I decided to sit down with him and try and impart some wisdom. I told him that he would be evicted, which he knew and he was okay with.
He said he was sorry. But thought that it was going to work out. He wanted to get on a payment plan to pay me back. He said I did him a huge favor letting him live in the place and he never wanted to not make the payments. But he was under so much stress with his kids in a different location, and the car, and the job. It was all really just too much for him at 23.
I said, “Well look. You are already into some serious issues and I don’t want to make life worse for you with legal action but we need to sort this out.” So we came up with a payment plan, and I generously told him I will give him 15 months to make all of the payments.
To this day I have no idea why 15 months. But, that’s what I said. So, we drafted a note and both signed it that he would pay back $2,850 within 15 months.
I was shocked that on month 1 he sent $500. I was now down $2,350. on Month 2 he sent $300. Yikes. I was now down $2050. On month 3, can you guess what he sent? If you think $100, you are wrong. He sent $500. Things were looking good… I was now down $1550.
With the last payment he said he had moved to a new place, sold his car and had a new job. He was back near his kids and figured out how to make life work.
Then month 4 came. Nothing was sent. On month 5-7 nothing again. On month 8 I was losing hope. But he sent $50. I was now down $1500.
That was the last money I received and the last contact I’ve had from him. Month 9-15 zero funds were received. I initially reached out two more times telling him to honor the agreement. However, I eventually lost taste for it.
I came to the conclusion that $1,500 to him was probably a lot more than it was to me. I also knew that it would cost a whole deal more to even try and recover the funds. Even with a favorable verdict payment wasn’t guaranteed. So, I decided to just let it go.
I sent him one last email and said, “Based on the lack of correspondence I understand you have decided to not honor your word. I understand this and can accept it. This is probably the only situation in life where you will get away with this. Think long and hard going forward before you make a commitment and always have a strategy for how you plan to completely execute the agreement. It’s how you finish the contract not how you start it. Good luck in life, take care of your boys and teach them better.”
When I think back on it, I see a couple of lessons to learn.
1. Enforce the contract sooner and don’t wait.
2. Evaluate the candidate better and require a higher premium for renting. At the time I only charged a half month security deposit.
I started to think about what it must have felt like to that person. He had his world crumbling around him and here was this person hounding him for funds. While, yes I agree it is part of life and he should have honored the commitment. I also see the other side.
Imagine if your life went to total hell in a day. Your kid has issues. Your car breaks down. You get fired. Now imagine someone coming to kick in your door to take your belongings and shake your core because of a few thousand. (Kind of what’s happening during the global pandemic)
Life is more important than money. Sure it takes money to get along, but it isn’t everything. Looking back at the situation, I almost wish I told him on month two to just finish out the month and then leave. The money wouldn’t be due. Go get your life straight and consider this your last free ride towards manhood.
With all of that said, I have a similar thought to the rest of you. To my family, I would lend whatever they needed. They are my support crew and if you can’t be there for your family who can you be there for.
When it comes to my close/best friends, I would lend them what they need. Mostly because they don’t need it anyway. However, if they did and it was a life and death situation how could I cast them out? Like one of the other replies said, maybe someday I would be the one needing money.
You can’t take it with you. So long as you have enough for yourself and your family, that’s what matters most. There is nothing wrong with sharing with others to help them on their way.
Sure if they abuse the issue, maybe I would change my tune, but so long as it is a genuine need and not just a cash grab, why not help the ones you love. Hell, I gave $1,500 to a stranger.
The Crafty Master Tenant
After publishing the first two stories, Daria shared her own sad money story as well.
The second story really hit home, except I was the tenant renting from the master tenant during COVID very recently.
The master tenant asked me to prepay 3 additional months of rent (I was already prepaid for the next month) to “cover unexpected expenses”, including her dentures. I work at an education nonprofit and rent in the Bay Area, so rent is not cheap relative to what I make. But I’ve been following your blog for several years and manage to keep a decent savings and liquidity buffer at all times.
Seeing as I was in a position to help, I sent her extra rent with no questions asked that same day. A few days later shelter in place began, and I started sheltering with my mom in the East Bay (about 40 miles away).
During this time she told me not to come back, repeatedly saying I would be “bringing foreign germs into the house”, while continuing to collect my rent.
I finally got her ‘permission’ to return to the premises. That’s when I discovered HER SON had been living in my room that I was paying for for the last 2+ months. Not only that, she threw my clothes onto the floor in a pile. She had searched through my drawers and taken my N95 masks for her own use.
I emailed her right away after moving out all my belongings immediately from the room, asking for my prepaid rent and deposit back. She began threatening me, making wildly untrue statements, saying I owe her *more* because of a spike in PG&E bills during November/December (I was traveling for work and holidays, so those were definitely usage spikes from her 2 adult children who came home for the holidays), and more. She also flaunted the fact that she has copies of my drivers license and passport, in some absurd way to keep me quiet. This woman is more than twice my age (her children are my age, including a daughter who is lawyer), likely makes a multiple of what I do in her occupation and seniority, receives several thousand in alimony from her real estate mogul ex-husband every month…
To this day, I have not recovered a penny of what I prepaid to her on good faith. I’m still waiting for courts to re-open in San Mateo County. However, the backlog seems like it’ll be a year before they start processing new small claims cases.
I guess my learnings are: (a) Sam is right! People who are desperate for money may not have the honor to return it later, and (b) protect yourself. Don’t send prepaid rent for several months out.
Thankfully, tenant laws are strong in California. I was able to find pro bono help. My rights as a tenant were violated (unlawful eviction, covenant of quiet enjoyment, deposit return, covenant of habitability, etc).
Lending Money Is Giving Money
Although these sad money lending stories have a different tone, they remind me that if someone is desperate enough to ask you for money they could seriously be in a world of hurt.
If you lend money to friends and family, just assume you are never getting it back. Once you set expectations to zero, you won’t feel significantly disappointed.
Of course, you secretly hope your friends and family will do the right thing and pay you back. At the very least, to preserve a valuable relationship. However, just being in the position to lend or give money is something to be grateful for.
If you think about it, someone asking for money must really be hurting because you can get a personal loan for under 10% nowadays. Worst case, you can put expenses on your credit card and pay a ridiculously high interest rate in the teens and up. Payday loans are just out of the question.
If someone close to me asks for money, I will give it to them. I’ll first let them decide the terms in which they plan to repay. If they can’t pay for some reason, I’ll suggest a plan where they can do some helpful work to pay off their debt.
There’s always something someone can do to provide value. And I’ve found that giving people the opportunity to work is a great honor. Nobody feels good about stiffing someone who lent them money in good faith.
Readers, do you have any other sad lending stories you want to share?