The Protocol of the Personal Loan

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There are numerous personal finance articles dealing with the perils and pitfalls of the personal loan.  When it comes to lending money to friends or family, the most recurrent piece of advice given is “Don’t.”  That’s not to say that many of these articles don’t offer potential lenders a lot of good advice on how to best navigate what can be a tricky and touchy situation.  Which is why I’m going to focus on the other side of the coin:  The protocol of the personal loan from the borrower’s point of view.

Like every other article on the subject, when it comes to borrowing from friends and family the best advice I can offer is “Don’t.”  The process is fraught with many bumps in the road that can serve to throw the best of relationships irreparably off track.  While philosophically it might be wise to adhere to the advice Polonius gives Laertes in Shakespeare’s Hamlet–

“Neither a borrower, nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry,”

–in reality that may not be an option.  So, you’ve got a big expense and no ready cash to cover it—what do you do?

Exhaust all other options first: spend less, make more

Before ever requesting that anyone sacrifice their hard-earned savings to keep you afloat, you should make sure you’ve done everything you can in making sacrifices of your own.  Be ruthless in trimming unnecessary expenses–and make sure you have a realistic view of what’s “necessary.”  Cable bills, anything other than basic cell phone services, eating out and other entertainment costs should be slashed from your budget.  It’s not cool to expect someone else to fund a lifestyle that is beyond your own means.

Speaking of “means,” effort should be made to increase your income.  Whether it’s negotiating a raise at work or finding a part-time gig to score some extra cash, make sure you’ve explored all options for balancing your expenses with sufficient income.

If cutting costs and increasing earnings doesn’t resolve your deficit, consider scaling back on your possessions.  Yes, it sounds harsh—but consider it from your potential lender’s point of view:  Nobody is going to feel comfortable handing over a nice chunk of change to someone who drives a Porsche and owns a 60″ plasma HDTV or a closet full of Jimmy Choos and Manolos.

At this point if you still need money, here are some steps to take to make sure that “a loan between friends” doesn’t end up being a case of money coming between friends:

Be a good risk.

Let’s face it:  If you were truly loan-worthy, you’d be able to go through the process and get the funds you need from a bank instead of your buddy, Bob.  That being said, you should still ensure that you’re responsible enough to warrant a personal loan.  Going through the process of cutting expenses and getting a second job shows that you are taking charge and holding yourself accountable.  This makes it easier for a lender to take a chance on giving you money.

Make it legal.

Create a formal agreement between you and your lender that specifies the payoff date and a payment plan.  There are various online options you could utilize: and LendingKarma have customizable loan agreement forms and loan trackers available.  Or you could purchase a template from  But given that money is an issue, it’s probably best to just customize a free loan agreement template with the details of the terms such as interest rates, payment schedule, collateral, etc.  Putting it down on paper will ease the mind of the lender as well as making the obligation less tenuous and more tangible for you.

Have a plan.

Make sure you have a way to repay the loan in a timely fashion.  No lender is going to be comfortable with an open-ended “whenever” agreement—even your best buddy, Bob.  Use a loan payment calculator to break your loan amount into manageable monthly payments and come up with a way to free up resources to make those payments in a timely and consistent manner.  Perhaps make weekly or monthly transfers of the money you save by giving up your daily Starbucks latte into your lender’s PayPal account.

Walk the walk.

Once the immediate financial pressure is alleviated, don’t slack off and slide back into the habits that got you into trouble in the first place.  You especially want to make sure you’re not flaunting any frivolous purchases in front of your lender.  After all, if you can’t afford to pay your rent, you shouldn’t be shelling out money for the latest video game release or a new designer handbag.  This is one positive aspect of an impersonal bank loan:  A loan officer won’t be giving you the side eye at Thanksgiving dinner like Uncle Fred over that $500 you owe him.

Foreclose on your pride.

Even if your lender is collecting interest on your loan, the fact that you’ve accepted money from them opens you up to their scrutiny and often-unsolicited advice.   Whether it’s a lecture on how people were more fiscally responsible back in the day by Uncle Fred or a copy of a book by Suze Orman from Bob, it’s part and parcel of the price you pay for a personal loan.

Accept rejection graciously.

Even if your buddy Bob just scored a big promotion, that doesn’t mean he has to use it to stave off your foreclosure.  Recognize that many people are uncomfortable with money issues and the strain they can put on relationships. It’s a personal loan, but it’s not always personal. Bob may have had a bad experience in the past and vowed never again to lend to a friend, no matter how close or trustworthy.

Pay it back.

The most important aspect of receiving a personal loan is to pay it back.  Just about everyone has a story about lending money to a friend that ends up with them losing the money AND the friend.  Don’t be included in that statistic.  Be the happy anomaly that restores faith and trust in a positive outcome when it comes to borrowers and lenders.

Don’t “Lather, rinse, repeat.”

Once you’ve paid off your debt, continue to maintain your frugal tactics to build up an emergency fund so that you won’t find yourself in similar circumstances in the future.  Although repaying a loan proves that you’re a good risk for future financial needs, the real lesson that should be derived from the situation is gain more control over your finances so that you never have to put yourself or your friends and family in the awkward position of asking for money again.

Do you have any personal loan horror stories?  What lessons did you learn from the process?

The Protocol of the Personal Loan was written by Stella Louise, Editor of the Blog & Save, a blog for savvy consumers looking to live well for less.