Don’t ruin a relationship through financial debt

Article written by Stephen Davies

There is one sure-fire way to damage a friendship, and that is lending or borrowing money. It can even damage family relationships too, although relatives tend to be far more forgiving if debts don’t get repaid.

The problem is that when someone you are close friends with or you are related to asks you for money, its immediately puts you under pressure. There is the pressure of worrying about lending someone money in the first place, and there is also the pressure of refusing the request and fearing that your refusal could irrevocably destroy the relationship.

It seems like it’s a lose-lose situation.

The fact of the matter is that you really have to be prepared to lose the money once and for all if you do make your mind up to help out. If you aren't prepared to write-off the cash, you are better off walking away.

Covering the opportunity cost

No-one should expect to borrow money for free. There is always an opportunity cost for that money if you are savvy about your savings. You can put it in an ordinary saving account, (even though interest rates are pretty poor) or you can put it into a particular type of savings account or investment that offers higher interest.

The general rule of thumb is that the safer the investment, the less interest it offers.

If you do decide to offer a loan to a friend or relative in need, the opportunity cost of doing so is forfeiting the interest that it would have accrued. You should at least expect the borrower to cover that risk.

Learning how to say no

The most significant risk, of course, is when the borrower reneges on the agreement and doesn't pay you back the whole amount or indeed anything at all. It's not a risk that most of us can afford to take – especially here in South Africa where we are not the richest of nations.

The other thing is ‘steeling yourself to say no’. But it doesn’t have to be an open and shut refusal. You can try offering some advice on money management, or steer the person in another direction where they can get a loan from a legitimate and safe source.

Stick away from Loan Sharks and Mashonisas

The worst thing anyone can do when they are looking to borrow money is to go to a so-called “loan shark.” A recent article on the Business Tech website reports that there could be as many as  40,000 loan sharks operating here in South Africa including what are known as “mashonisas,” non-registered crooks who are not afraid to use threats to recover loans issued at exorbitant rates of interest.

Mashioisas and other loan sharks are not always easy to identify. The look and initially act like ordinary people. It is only when debts are unpaid, or repayments are late when the trouble starts.

Is the loan source NCR approved?

The easiest way of ensuring that someone seeking a loan doesn’t become a victim of this sort of financial crime is to advise them to check out whether or not their proposed loan source is approved by the NCR (National Credit Register). If it is not, the company should be avoided.