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Real-life MMD: Should I act as guarantor for oldest friend's son?
edited 3 December 2013 at 5:35PM in MoneySaving polls
74 replies 14.8K views
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Or point him in the direction of the Princes Trust.
Its one thing lending money to your own family but lending it to the son of a friend is a definite No.
What you have to think about is,
Would you lend it to your own family member, if that answer is NO then so should this be, or
the Business is a flop and fails you've lost straight away there, then your friend for some reason, looses his job, ends up bankrupt etc etc then YOU will end up paying for it all yourself.
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry."
Polonius' advice to his son, Laertes in 'Hamlet'. Best advice ever.
Don't lend money as if the loan goes wrong it will destroy your friendship through resentment too. And borrowing is a bad idea as it will make you imprudent and you will lose control of your ability to control your money.
In this case where your friend is asking you to be guarantor of his son's loan the son is more than likely to default leaving you with loss of capital and responsible for paying interest on top. The child has 'form' for imprudence and is not a good risk. Your anxiety and (inevitable) feelings of resentment would sour your relationship with your friend. If he cannot not forsee this (possibly a lack of insight and self knowledge that he has passed on to his imprudent son) and is foolish enough to ask for this financial security, then you should act as the responsible party by refusing to act as guarantor. There is nothing to stop you doing this tactfully by phrasing it as 'I can't...' rather than 'I won't...'
If you did, you could on the one hand be facilitating a loan which leads to a great business start-up, but you could also be facilitating a loan for a shaky business which leads to years of debt and misery.
You don't know which effect your good intentions would have for him.
As others have said, help him in other ways. Offer to use your contacts (if you have useful contacts) to help him get experience in his chosen field or an allied field.
Help him with his business plan.
Help him research organisations that support start-up businesses.
In the long run, this help could in fact be far more valuable to him than standing as guarantor.
If his father doesn't understand, simply say "I wouldn't want to facilitate a loan where he would end up in the same position as you in three years' time".
Your committment to your friend is personal.
Money is not personal, it's business.
If the son came to you directly and asked you to lend him £5k at the same rate of interest your bank is paying now, with no security, would you even stop laughing long enough to consider it?
Unless, of course, you are retired with hundreds of thousands of pounds in savings and no needy offspring... then it's a modest favour.
Longer answer is,there must be a reason why the bank has said NO. Explain to your friend that you don't feel able to lend the boy the money. Remember,it is the boy you are lending the money to,NOT his Dad.However much of a friend the Dad might be,it is the boy who has to pay you back and if you have doubts about his ability to do so then don't lend it to him unless you are prepared to lose the money and probably the friendship. Offer to help in a more practical way.For example, has the boy got a well written business plan or has he looked for financial help from other lenders?
If yes - then do so! (in exchange for some shares in the fledgling business)
if no - then you have answered the question you asked us....
Getting involved as a guarantor for someone who is not family. In my opinion will only end sadly, in my experience. I ended up having Debt collectors knocking on my door because my then friend had defaulted on the loan. An absolute nightmare.
Learn from my sad experience and decline, politely.
Also, this is something he *desires* to do, not *needs* to do. There's no reason you should suffer financially for something he would "quite like" to do.
You'd be paying him for a luxury.
Other than that, maybe see it as as standard investment opportunity. You know him, listen to his business plan. Does it have legs? Are you willing to risk losing £5k+41% interest? If so, then be sure you are a shareholder until he can repay.
Also maybe look into getting the money yourself at a rate which he obviously can't. Possibly free some equity if you have property, mortgage rates are at 3% presently. Then either buy shares or write a loan agreement yourself.