Question: 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.
Answer: In a word, No. And in two words, Absolutely Not.
Lending a flakey friend that kind of dough is a very generous thing to do, and insisting on some security in no way dilutes your generosity. After all, nowhere is it written that, in lending people money, you are required to make it as easy as possible for them not to repay you. And neither is it written that at the Bank of Friends and Family, the borrower gets to set the terms. If Tom is unhappy with the arrangement you propose, he can always try to find a friend or relative —- or, of course, a real bank —- who’ll offer him a better deal.
That said, we suggest you not secure the loan with his car. Why? Because if Tom’s as irresponsible as you say, there’s a good chance you’ll end up having to choose between two equally unattractive alternatives: taking possession of your buddy’s car (and there goes your friendship) or ending up with nothing.
Instead, 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.
Questions? Email Money Magazine’s ethicists – authors of “Isn’t It Their Turn to Pick Up the Check?” (Free Press) – at FlemingandSchwarz@right-thing.net.