“A man lacking in sense pledges, And becomes surety in the presence of his neighbor.” (Prov 17.18 NAS).
The Bible warns individuals against putting money at risk/personal loans to neighbors. The Bible affirms certain types of loans but not others.
3 Categories of loans:
To my knowledge the Bible recognizes these three types of lending/borrowing:
- *’mercy’ loan to a poor person at no interest are OK- Exodus 22.25-27
- commercial lending institution can legally, morally make loans, Matt 25.27; Luke 19.23
- personal loans /co-signing notes for neighbors, strangers are warned against three times in Proverbs/can be unwise, hazardous.
This post is focused strictly on the third category of loan, personal or business loan to a friend/neighbor/loved one. As the Bible does not spell out whether to loan/borrow from those close to us I am offering some hopefully not totally unrelated, common sense thoughts.
There are great risks for both borrower and lender! When the loan period ends and borrower is unable to repay the personal loan an interesting dynamic can arise. A common view is that because unexpected circumstances have arisen the borrower should not have to keep his end of the agreement. Perhaps he has lost his job, his wife has high hospital bills or one of a hundred unexpected circumstances. The borrower can go to some lengths to assert why he should not be held accountable to fulfill the agreement he signed in good faith.
Unforeseen circumstances do often arise! We are not able to predict the future. Our knowledge is limited. So what is the answer? We should respect the advice of the One who can foresee the future. God knows what can lie around the corner for us. So what is His wisdom? Avoid deep debt in the first place! And certainly excessive debt.
“Due payment of debts (Rom_13:8): “Owe no man any thing”; that is, do not continue in any one’s debt, while you are able to pay it, further than by, at least, the tacit consent of the person to whom you are indebted. Give every one his own. Do not spend that upon yourselves, which you owe to others.” The wicked borroweth, and payeth not again, Psa_37:21. Many that are very sensible of the trouble think little of the sin of being in debt.” – Matthew Henry Commentary.
Former British pastor Charles Spurgeon, J. Hudson Taylor, some Christian organizations have policies not to go into debt. “Certainly no one should get into unnecessary debt, or sign contracts he cannot maintain. “Thou shall not steal.” But to make Romans 13.8 (“Owe no man any thing”) apply to all kinds of legal obligations involving money is, to me, stretching a point.” – Warren Wiersbe.
We know that sin has consequences. Once one gets into drugs or crime it can lead to very unexpected consequences. A fellow robber might shoot some one and we are also imprisoned for that killing. Sin is like a car going off the road down the mountain side. Once off the road the driver loses control. The car can tumble over and over. Unforeseen consequences happen. We control whether or not to sin. But once in it sin’s consequences are not in our control!
Similarly when we personally loan or borrow money we are great risk. I am not saying loaning/borrowing money is always a sin. I am saying it is unwise, risky. We can be digging a hole for our self. God knows the unforeseen consequences waiting around the bend. God does see the future. He is trying to warn us . . . and to help us avoid them. Don’t get into debt–especially borrowing more than we can easily repay even in bad times. Loaning or borrowing money from loved ones is doubly unwise if the borrower lacks the income or disposable assets to cover a loan if it goes bad. Don’t give bankruptcy/poverty/damaged family relationships a stick to hit you with.
Borrowing can be addictive. It can become an easy way out rather than wait and save up the money/review one’s monthly budget/spending patterns.
Proverbs warns in effect against co-signing a note for some one, “going surety.” (Prov 6.1-5; 11.15; 17.18). Three times Proverbs addresses this! This implies that borrowers do not always deserve a loan/have good credit. Proverbs has a balance between mercy and protecting the lender. Proverbs warns to avoid risky personal loans. Warning buzzers should be sounding. Limited exceptions to this may apply—like helping a teenager buy his first car IF Dad has reserve funds to cover the loan if it goes bad.
And if it is one time emergency why not just give them the money–mercy gift? This way the relationship is not put at risk. You have no expectation of getting the money back.
Some unexpected circumstances can prompt some borrowers to feel they are being treated unfairly if they are still expected to honor their word, their repayment commitment in bad times as well as good. Did they have a back up plan before borrowing the money? Are they suddenly a victim of unfairness? Or, are they reaping the woe of ignoring biblical warnings? Have they been caught off base? Some borrow beyond their ability to pay it back out of their assets if needs be.
Some borrowers seem to want it both ways. (1) They ignore God’s warning to avoid unwise/excessive debt then (2) blame the lending friend/loved one’s lack of fairness and mercy when consequences overwhelm them.
- Should the lender be expected to keep his word—to fulfill the agreement he signed in good faith? Is his character, his integrity, on the line?
- Should lenders feel morally obligated ( mercy) to extend a defaulted loan as long as borrower has a need for it? In other words, at some point does mercy shift control of funds to borrower?–“As long as I still have a need are you, lending friend, morally obligated to meet it?”
- What is a mutually fair, mutually merciful, balanced, specific formula that could be included in a loan document to spell out exactly when an overdue loan should proceed to default and collection?
My Dad warned me against loaning money to friends. If they can’t pay it back on time it can injure the relationship and the money is at risk. Often better to say, “Tom, I want your friendship more than I want to go into the banking business.”
Often when people want to borrow money what they need first of all is some financial counseling. (1) Living within their means? (2) Would we just be enabling some dubious or unnecessary habit? (3) Got monthly budget? (4) Other loans outstanding? If they can talk to me about a loan, my money, should I be able to discuss their money, their finances with them?
This post is dealing with sizeable loans not the small nickel and dime issue. Usually I believe it is better to give the money to a loved one or friend rather than do a personal loan. I refer here to personal not business loans. But where a loan is appropriate it is wise to treat it just like the bank does. Set up terms, interest, late fees and due date. If they balk at this warning buzzers should be sounding! Many people come to a relative because their credit is bad. They are as poor credit risk. Do they have something to put up as collateral–or do they see the loved one as an easy touch, Santa Claus, patsy? Don’t expect others to do what you would do. Do not assume!
Some businesses and individuals have eaten through their resources and are in a downward spiral–free fall. They have no other option it seems but to continue to seek more loans even though their ability to repay them is dubious. They are desperate. Debt is unwise. It can come back to bite us. Drink upstream from the herd.
- Good credit risks can get money from their bank. Beware of those who cannot.
- Friends and loved ones can expect the lender to treat them differently than a bank would. Do they see the lender as a relaxed, Sugar Daddy? Santa Claus terms?
- Learn from the commercial lenders. Ask to see a balance sheet on a sizeable loan request.
- Credit ratings are important.
- Do they have likely ability to repay the loan? Have a steady job?
- For good reason banks require collateral.
- One scraping bottom financially is a poor risk. Have savings put back or living hand to mouth? Got emergency fund?
- It’s wise to treat friends as friends as borrowers as business contacts. This is very difficult to do! We care about our friends and want to help them.
- Old saying: a true friend was never lost by keeping accounts straight.
- Don’t lend more than you can afford to lose.
- Have they been turned down by lending institutions? Why? Watch out. Are you the lender of last resort?
- Is this business flourishing, well heeled, making money, in the black? What is their cash flow, working capital, assets?
- Struggling start up ventures are a different breed of cat. higher risk. Ergo a much higher interest rate is deserved.
- Use a formal, written loan agreement. Terms get fuzzy over time. If one party dies their survivors/estate need to know the terms.
- It may take 1-2 loans going bad before these guidelines seem important.
- Make sure no addictive behavior is present. Don’t enable an addict be it druggie, alcoholic, gambling or out of control spending.
- Walk through the procedure if and when the personal friendship loan goes bad. Be firm, be clear, on repayment expectations.
- Loaning money to friends/loved ones is not a good idea. Most of us are not loan experts. Let the commercial institutions do the lending.