How to lend to a flakey friend? Don't do it


A Money magazine reader asks ethicists Jeanne Fleming and Leonard Schwarz "Is there anything wrong with asking a good friend to secure the loan I'm giving him with the title to his car? Tom really needs the money, but he can be pretty irresponsible, and I don't want my $2,500 to become a gift."

The ethicists get the first part right (Answer: In a word, No. And in two words, Absolutely Not.") but then offer some really bad follow-up advice: "Consider asking Tom to give you some collateral to hold until he repays you: a fine watch, say, or his prized Stratocaster -- something of sufficient value to give him a real incentive to pay off the loan. Because you're right: You don't want to bet $2,500 on the good intentions of an irresponsible friend."

Here's why you shouldn't do that:

  • If Tom is so hard up for cash that he's trying to borrow $2,500 from a friend (most people borrowing cash from friends are borrowing it to stay afloat and make payments on other debt) and he has a watch worth anything close to $2,500, he should sell the freakin' watch. If he's so brain dead that he'd rather go into debt to a friend rather than sell a watch, you really don't want to lend money to him.

  • If his watch is so important to him that he'd rather hit up a friend for cash than sell it, are you really going to be prepared to sell it to make good on the debt?