Question: My mother passed, and I inherited $20,000. Thankfully, I have no debts other than a mortgage on my townhouse. I didn’t go to college but opened my own hair salon, which has done well enough for me that I pay off my credit cards every month and even save a little for a rainy day.
So here’s the problem. My best friend since high school is an amazing woman. She went to law school and now works as a prosecutor, putting away bad guys. She actually makes more than I do, but she has steep student loans. She also has $10,000 on her credit cards. She asked me to pay off those credit cards, and she’d pay me back $500 a month. She’d use the savings from the interest rate to pay down her student loans.
Should I do this? She’s my best friend, but I’m feeling uneasy.
— Paula in New Hampshire
Howard Dvorkin CPA answers…
You feel “uneasy” for a reason, Paula. That’s because you’re in a tough spot.
If you don’t lend your friend the money, she’ll be hurt or angry or both. That could cause a rift in a longtime relationship. However, if you do lend her the money and she fails to pay it back, you’ll be hurt or angry or both — which could also jeopardize your friendship.
A year ago this month, I received a similar question from a woman whose husband wanted them to borrow from their parents to pay off credit card debt. While advising against such a move, I outlined rules for personal loans. If you decide to go ahead with the loan, I urge you to read those first.
Questions before cash
Before you write that check, Paula, ask your friends some tough questions. Don’t lend any money until you get honest answers…
- How did you get into this credit card debt? There’s a big difference between a one-time emergency (such as an illness) and regular visits to the mall.
- Do you have any other debts I don’t know about? Student loans are oppressive enough, but you need to know if your friend has an auto loan, a mortgage, and any other debts.
- Can you control your spending? Is your friend good with money? If not, then your loan isn’t solving a problem. It’s just delaying a disaster.
If any of the answers still make you “uneasy,” don’t loan the money. Instead, make the following recommendations…
I’ve always believed personal loans should be a last resort. They shouldn’t even be considered until all other options have been explored. Your friend has a couple.
She can take out a personal debt consolidation loan, and she can secure such a loan with excellent rates through Debt.com’s Get A Loan program. She will, of course, pay interest on that loan, but she’ll save much more than she would continuing to pay the steeper credit card interest.
Her best (and cheapest) option is a free call to one of Debt.com’s certified credit counselors at 1-800-810-0989, where she’ll receive a free debt analysis. Until she at least makes this free call and hears about her options, I’d stall your friend — because there may be a better way, Paula.
Have a debt question?
Email your question to email@example.com and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.