How to lend money to friends (without ruining the relationship)

How to lend money to friends (without ruining the relationship)

Lending money to friends and family is a generous act — one that could easily backfire and even ruin your relationship. Most of the time when someone is considering a loan to a family member, I think, “Don't do it.” There can be other ways to help. But when it's someone you care about, logic only plays one role in the decision-making process.

Not too long ago I was in this situation. (I want to share it, but obviously I also want to be sensitive about revealing personal information, so I'm changing names and other minor details.)

I've been friends with Megan for almost 10 years. In that time, she's never had much money, but she also never asked for so much as $5. Last year, she and her boyfriend rented an apartment. A month later, he lost his job, and she had to go on medical leave. He couldn't find another job, and she had tried to return to work but her doctor wouldn't sign the medical release (it was still too early). To complicate things, they had a child. I knew my friend, and I knew she was only asking for help because of her child. They were behind on rent, and although she had just started back at work, she wouldn't see a paycheck for another two weeks.

I don't believe in loaning money most of the time. It's not that I don't want to help make things better, I just think that in most situations it's a temporary fix. If someone can't make a house payment this month, what's going to change next month? In many cases, money troubles are a sign of ongoing issues and habits. Also, it can strain your relationship. If your brother owes you $1,000, and he buys a Harley motorcycle, you can't help but wonder where he came up with the cash when he hasn't even paid you back. Then things get icky.

The Right Way to Lend Money to Friends

I ended up giving my friend the money. I felt that this was a situation where she just plain fell on some hard times. The job situation couldn't have been predicted. They thought they had two incomes to cover a very modest apartment. There wasn't a sufficient emergency fund to cover situations like this. She was unable to work, and now that she could, she had to wait for a paycheck.

But I was careful about how I did it, both to protect my interests and our friendship.

Here's what I did:

  1. I talked it over with my husband. He and I had a conversation before I gave my friend an answer. Talking it over with my spouse was good to know we were on the same page.
  2. I expected to not be repaid, and only loaned as much as I was willing to lose. My husband and I agreed that we would view the money as a gift, not a loan. If she paid us back, fine. If not, fine. I made it clear that we weren't expecting repayment.
  3. I helped find a solution to the situation. If possible (and only if they're okay with it), help your friend in other ways. In my case, I knew someone who could give my friend's boyfriend a job.

I've read several articles that advise drawing up a contract when lending money to friends or family. While it seems like a good idea, what will you really be able (and willing) to do to enforce it? If your friend or relative doesn't feel a responsibility to pay you back, a piece of paper isn't likely to change that.

Not Always a Happy Ending

Unfortunately, my friend continued to have money problems, and eventually she was evicted. Her boyfriend was fired from the job after a few weeks. While I feel for her, that's the extent of how much I can help her — at least financially. I don't regret our decision to help out, and though the money is gone, our friendship has remained intact, which was my primary concern when she asked for help.

Have you loaned money to family or friends? How did you do it? What went right? What went wrong? Do you have any advice for others in this situation? (Or, if you've borrowed money from friends or family, what can you tell us from that side of the fence?)

More about...Debt

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Pamela
Pamela
9 years ago

April, you are exactly right with #2. Always think of it as a gift instead of a loan. But then you need to put it out of your mind. You have to force yourself to never think again about lending that money. Because if you do, you’ll find yourself second guessing the decision or judging your friend’s choices which can still poison the friendship. And if you don’t think you can do that, you might want to reconsider making a gift/loan at all. Perhaps you’d be better off providing help “in kind” like doing childcare while your friend looks for… Read more »

Lewis
Lewis
6 years ago
Reply to  Pamela

If you make a deal and if the lender says he will pay you back then it is not a gift. My Bro. says I will use my gun as collateral so I got his gun now and gave him two weeks to pay it back . He says I am being a jerk by not believing him. Now I am the jerk for lending him money. GO figure. I should have known. Want to by a used shot gun?? lol

Chipmunk
Chipmunk
9 years ago

A great topic, and a very sensitive one too. A few years ago my mother asked me for a loan of $9,000 to help her out of a financial jam. I gave it to her as a gift, not a loan. Then I neatly shunted her out of my life, and we have had no contact since then. You see, she is one of the most fiscally irresponsible people you can imagine. Her whole adult life has been one financial (and personal) mess after another. Some people are like that, and they never learn from their mistakes as long as… Read more »

SF_UK
SF_UK
9 years ago

My parents have helped other members of the family out quite a lot. In each case, they make it clear that the “loan” is interest-free and for as long as it’s needed. They view it themselves as a gift. AFAIK, many of the loans have been paid back in part or full, and if anything, it has strengthened family ties. Gifts to help someone out can pay back in unexpected ways. When I inherited a car I didn’t want, and couldn’t afford to keep, I gave it to my grandfather, whose car was starting to need more maintainance than he… Read more »

Derek
Derek
9 years ago

This is a tough topic. You might consider your loan a gift, but it might be something that’s always hanging over the head of your friend, because she really wants to pay you back.

Maybe setting up an alternative would be a good solution. If she can’t pay, then maybe she can help you in the garden, or her husband can assist in the remodel of your house. You won’t see your money, but this way, you might still keep your friends.

Nancy L.
Nancy L.
9 years ago

I have one person in my life who *constantly* asks me for money. My response is always the same–I offer the amount I would spend to take that person out for dinner. Anything more than that, and I would be angry and mad at them which would affect my relationship. (The cycle of asking me for large amounts of money is starting to affect it as well, but I have no control over that side of it.). This person has gotten at least five major ($1000+) loans from other people and has never paid back more than $100-200 to anyone.… Read more »

Elle
Elle
9 years ago

I had a friend who did a similar thing for me when I was almost a year into unemployment and my car was towed from my parking lot(I had 4 unpaid parking tickets, and the city could see my license plate from the street so I was fair game.) I don’t think she even checked with her husband, but they both had great jobs and $500 wasn’t as huge a deal to them as it was to me. She even came to get me with her daughter in the back seat, went to the parking referee to pay the tickets,… Read more »

Crystal@BFS
9 years ago

All of the times I have loaned money ($50-$350 so far), I expected to see nothing back as you suggested. I have been very lucky that all of my friends (and the two coworkers) were able to pay me back eventually. It usually takes a few weeks but once it took 2 years, lol. I just can’t turn down someone in need, so I’ve just gotten very lucky. The ironic thing is that the one time we actually put money into a friend’s business and expected it back, we ended up losing $12,000…ouch. We were lucky we were young enough… Read more »

Anonymous
Anonymous
9 years ago

I have borrowed money from a friend and would not do so again. The friend I borrowed money from had a large amount of private wealth and initially told me that I could pay the money back whenever I wanted to. I was resistant because I did not know when that would be and knew I could not afford any more monthly payments on anything, but he insisted. I was very grateful, because at the time I desperately needed the money, but six months later when he decided that in fact I had to pay the loan back at £1000… Read more »

Tim
Tim
9 years ago

This hits home big time! When my girlfriend and I started dating several years ago, she tried to be a “sugar mama”. I, regretfully, allowed it with the understanding I would pay her back. Shortly after, my son’s mother took me to court for sole custody and support. It caught me off guard but I had the funds to pay for the lawyer. That lawyer ended up getting me in more trouble so I had to fire him but was left w/ no funds for an additional lawyer. I took out a loan against my 401K and it still left… Read more »

Nicole
Nicole
9 years ago

We only give. And we keep swearing that we will never do it again… especially after the time the relative in question complained about inability to buy groceries for his five kids and then bragged about buying an XBox. But we always do anyway, although never so it hurts us anymore (that XBox actually did affect our own spending… current giving doesn’t as we make more money now). We’ve accepted that he’s bad with money, though getting better, and that he has 5 kids. At Christmas this year, a few of our gifts to younger relatives were cash. Cash to… Read more »

brokeprofessionals.com
brokeprofessionals.com
9 years ago

My parents have friends who were always irresponsible with their money. They would go into credit card debt and then they would ask their parents to bail them out. Their parents would always pay on the condition that they “cut up their credit cards,” which they would make a big show out of, but then go back to using again. This cycle continued for years, and ruined their relationship with their siblings (pissed that mom and dad were giving so much money to one sibling). And I am talking about 10-20 k each time. Finally, their parents died and they… Read more »

Jason@LiveRealNow
9 years ago

I sold a truck to a friend who couldn’t afford it on the terms “pay me what you can, when you can”. It still hasn’t been paid off 3 years later, but I refuse to worry about it.

My renter is also behind on rent, but I’m teetering on forgiving the debt instead of caring. I don’t like stressing about the money my friends owe me.

crystal
crystal
5 years ago

Um, no You are a business owner, please don’t be a doormat. You aren’t made of money hints why you have a business.

Always set-up terms in a contract with in-tent for repayment cars or big purchases. Monthly rental terms- clear text, late payments incurs 50$ late charge and something to get their attention so it gives them incentive to pay on time.

Money Beagle
Money Beagle
9 years ago

I’ve loaned money to friends and family three times. Twice it worked out as the friends paid me back in full when they said they would. The third time was actually a family member and she suddenly went quiet and stopped making regular payments. Eventually she did come through but it definitely put a strain on the relationship which is sad because we were pretty close before then.

Anna
Anna
9 years ago

My siblings and I regularly lend money to each other, have done so for years, and have suffered no ill effects (in fact, I would say that our casual loans have made our relationships with each other more trusting). I will begin by saying that I am about four years older than both my siblings and recently out of college. Our money lending began (in earnest) when they both started attending university themselves. My sister asked me to purchase her schoolbooks online for her since I 1) knew the best places to go for reasonably priced books, having done so… Read more »

Mom of five
Mom of five
9 years ago

We have loaned money to relatives many times. We’ve been repaid less than half those times. We have always considered it a gift and have never loaned more than we could afford, so we don’t have any hard feelings. I’m not sure I could remember all the times we’ve given money, and I’m pretty sure some of the recipients have forgotten as well as the money was given during times of extreme stress for them.

Anon
Anon
9 years ago

My wife & I have loaned money to her parents at times. I believe they want to pay us back but have not been able. At first we, no I, wanted to view it as a contract with terms for repayment, no interest but a plan for when we would be repaid. Now, I view each time as a gift. My wife and I discuss the amount and decide if it’s more or less than we can afford to lose and give based on that. If we get paid back, great! If not, that’s great too because we still have… Read more »

Everyday Tips
Everyday Tips
9 years ago

I have ‘loaned’ to family and I did borrow from a friend once. (He sold me a really cheap car and I paid him for it a few months later, it worked out fine.) I am going to loan money, I have to be willing to accept I very well may not ever get it back. In some situations, it is entirely predictable that it is just a sunk cost. The hardest thing is saying ‘no’ to someone that you have ‘loaned’ to before. Some people just need to have the financial apron strings cut off because they just will… Read more »

A
A
9 years ago

“I knew she was only asking for help because of her child” This really bothers me. Would you not have given the money if they had been in the same situation but without a child? I see this kind of thing all the time, things implying that those with children are worthier of all things in all regards; example: someone said “I feel lazy and selfish about not shoveling our sidewalk” and the responses to her were along the lines of “You shouldn’t feel bad about it because you’re raising a child”, effectively implying that those with children need only… Read more »

Efraim
Efraim
5 years ago
Reply to  A

Very good points. Thanks for bravely sharing this viewpoint–a very unpopular one. Childless myself, I’m too often expected to assume additional responsibilities at work and in my community, responsibilities I won’t be compensated for. And if I refuse–I do have my own personal life–there are usually lasting negative consequences. Consequently, I’ve become far more generous to my acquaintances without children, witnessing how often they are taken for granted, how often it’s assumed that simply because they don’t have children anything is within their reach, and they therefore aren’t worthy of the help and consideration of their communities.

Mike
Mike
9 years ago

What about personal loans as benefits to both parties? I’ve been trying to convince my parents to do a personal loan, where I’d pay interest and set and pay to an agreed upon schedule. This would be to pay off our second mortgage. We’d both get financial benefits as they’d get a better rate than a savings account (which is where they have much of their money) and I’d save on interest. Our ability to pay isn’t an issue. They said they’d be reluctant to do so because they couldn’t do the same for my brother. I feel they just… Read more »

Joanne Francois
Joanne Francois
9 years ago
Reply to  Mike

I know you believe that your proposal for your parents to lend you money with an agreed upon repayment rate plus interest is a good deal for both parties; but the truth is that this is only a good deal for you. Your financial endeavors are not your parent’s responsibility and you should keep them separate. You are actually placing them in an awkward situation by asking them to be involved in your finances. It doesn’t matter that you would pay them interest because that benefit is superceded by the fact that you are placing them in an awkward position.

E
E
9 years ago

I think I would have done what you did, except – instead of “thinking of it as a gift”, why don’t you truly make it a gift. That doesn’t mean thinking if they pay you back, great. That means giving it to them as a gift, and not expecting them to pay you back, and telling them that when you give it to them. It sounds like you could afford to give this money. But people need to remember, if you can’t afford to give the money as a gift, then you can’t afford to give it as a loan… Read more »

Exs
Exs
9 years ago

I’ve borrowed money from three friends ($1000/$500/$300) over the years. I had it each time but in accounts that would take a couple of days to transfer to my checking account). They didn’t hesitate, ask any questions about what it was for, or when I’d pay them back (which was within the week after the transfer went through or if I received a paycheck at the time). I loaned $1000 to a friend, which she eventually paid back though we had no agreement. Family members have never asked for a loan; usually it’s in the form of covering them because… Read more »

Patti
Patti
9 years ago

I’ve borrowed money from a long time friend twice. Both times we created a contract, both times included interest and the first time I paid her back on time; the second time I paid her back well in advance. Both times helped me move, once after my divorce. I’m pleased to say that I am now on track to pay down my debt, and build emergency savings and I hope to not have to borrow money from her again. I prioritized paying her back over higher interest debt because it was important to me.

Nicole
Nicole
9 years ago

@18 A Yes, with children it is different, because it isn’t the child’s fault that the parents are bad with money. If a child doesn’t get fed, that can have negative long-term consequences that not feeding an adult will not have. If we lived close enough to just buy groceries, we would. But the local grocery store is Walmart. Nobody is saying you have to shoulder anybody’s burden, but personally I am more likely to give when it means a kid is getting fed or educated than when it just means someone is going to lose their SUV. People with… Read more »

Efraim
Efraim
5 years ago
Reply to  Nicole

Nicole, no disrespect meant, but your reasoning sets up a false dilemma. It’s not that either a child won’t eat OR an adult without children will lose her/his SUV. Adults without children may fall on equally hard times, despite contributing to their communities consistently and having done their utmost to live financially responsibly. Moreover, there are already a relative abundance of social services to care for needy children and families with young children, but far fewer such services geared towards helping adults without children, so that the latter may actually experience greater risks during life emergencies.

Amy
Amy
9 years ago

1. Don’t loan or gift money that you’re going to desperately need in 6 months. 2. Don’t loan (big) money to people you’ve known less than a year. 3. Don’t loan or gift money you can’t live without. 4. Don’t loan or gift money if you’re going to be a jerk about it. 5. Don’t loan or gift money to someone you’re dating. 6. Don’t invest in a friend’s business if you can’t handle losing everything you invested. All of those tips will help keep you off of daytime court shows. Actually, I only needed one rule to guide me… Read more »

Just graduated
Just graduated
9 years ago

The point made about seeing how others act with small loans is a good one. I would also advise seeing how people act in a social setting as a possible litmus test. If someone is always taking advantage of someone else’s generosity during social events (eg, buying a round, picking up the tab for a movie etc.) it may be telling of how they would act in a loan situation. Obviously there are circumstances that can’t be avoided, but in some cases it boils down to selfishness and a lack of empathy on the part of the borrower. For me,… Read more »

Danielle
Danielle
9 years ago

There is a reason to “get it in writing” and it’s called divorce. If, say, a parent loans money to an adult child, they should have a written repayment agreement. If said child later gets involved in a divorce, without the agreement the money will be considered a gift to BOTH marriage partners. With a loan letter, both parties will be obligated (and it becomes part of the settlement). Believe me, you don’t want your soon-to-be ex spouse claiming your parents gave him a big gift with no obligations.

Jessica P.
Jessica P.
9 years ago

My best friend since childhood and I were living together when we were both putting ourselves through college. She had a better job and some savings – my tuition was due, but my loan money was late in coming due to some filing error. I didn’t have my share of the rent / utilities and she covered me and gave me extra to get me thru until I got the loan check. All in all it was about $800 that I paid back in full a little over a month later. Years later now – I am married with a… Read more »

Kevin
Kevin
9 years ago

As the saying goes, “If you lend a friend $20, and never see them again, it was probably worth it.”

evad
evad
9 years ago

Sadly, no one who knows how to handle money ever needs to borrow from friends, and that puts me in a very bad situation as a loaner. Most americans lack even basic common sense concerning money, if I loan you any serious amount of money in some emergency situation, only spend money on necessities until you pay me back. Unfortunately it never works out that way. What makes the situation doubly bad is that same brand of financial idiot will virtually always take major offense if you don’t loan them money. It can kill friendships. So, what’s the answer? Get… Read more »

Jason
Jason
7 years ago
Reply to  evad

I agree – I’ve never ever had to borrow money from friends. One friend in particular has zero debt with any financial institution, is now 30, has a full-time office job and still needs to borrow $20 here, a few hundred there from me. I have credit card debt and a car loan but have plenty of cash-flow to feel comfortable. I feel like asking him for money so that I don’t have to pay interest on my loans because that is what it is like he is doing. So effectively I’m paying interest for him. Plus I feel like… Read more »

Sustainable PF
Sustainable PF
9 years ago

I would dearly like to invest in one of my best friends. He is fantastic at what he does and I think he could be a success if I were to loan him the money to open a small business. However, he is not great with his personal finances and this has me concerned …

getagrip
getagrip
9 years ago

As a point, all the paperwork in the world with respect to payback won’t mean squat if the person can’t pay back. So even with paperwork you should be prepared to lose it. I lent a friend $5K once. At the time he was technically a millionaire but said he needed a dose of liquid cash and his was tied up until the end of the month. I’m not naive and knew full well if he was tapping me he was in trouble, but he is the reliable sort and a good friend. We drew up proper paperwork with a… Read more »

mike
mike
9 years ago

I loaned about $6k to my brother when he was in dire straits. I did stress the fact that I needed the money back but this was only because I knew my wife was going to have issue with it. Deep down, I knew I’d never see the money again and I’m honestly ok with that. However, it pains me that he doesn’t take repayment seriously. He’s been in the middle of a divorce and custody proceedings for some time now, and the last thing I want to do is divert money from his kids. I recognize how important their… Read more »

Wendy
Wendy
9 years ago

We have been very blessed to have been able to borrow money from my M-i-L… Seriously, she loaned us the money to pay cash for our house about 6 years ago. I make sure that she is the first person/bill paid every month.

Gwen
Gwen
9 years ago

Hi – I´ve read in Suzette Haden Elgin´s book about “Grandmother Principles” that she suggests a sort of “Family fund” that can cover crisis-situation like not being able to pay for rent one month – and to whom everybody in the family contributes. I find that idea a very fine one to be able to sustain the near-family. I wonder if such a system would be also possible among friends. (There is even a scenario written about when someone wants to withdraw from that fund). What are your ideas about this?

David Hunter
David Hunter
9 years ago

April, you’re exactly right with point #2. Give as a gift and don’t expect to be repaid.

I’ve had to borrow money from a family member a few years ago. We wrote up an agreement for me to pay him back in a year. I started paying him back monthly and paid it off by the end of the agreement.

I could never image NOT paying anybody back.

anna
anna
9 years ago

I have a friend who is just unable to save money. We used to be co-workers and then I found a better paid job. She started to ask me small loans, just to cover her bills and groceries until payday and avoid overdraft. She always paid me back but it started to happen too often, and I was irritated by the fact that apparently all her money went in compulsive shopping (clothes she never really used) and other not necessary stuff. I then told her I started to save and couldn’t lend anymore and I believe she then targeted another… Read more »

ponytimeyo
ponytimeyo
9 years ago

My parents were kind enough to lend me money so I could buy a grand piano. I teach, occasionally perform, and also work a day job to support myself. I could have gotten a loan through the bank but my parents were worried that if I had done that I might not be able to get a loan for a new (used) car since mine was nearing the end of its life. They offered to lend me the money and we figured out a monthly payment plan that I could handle. I am so grateful for their help. There is… Read more »

Matt
Matt
9 years ago

I think it’s easier to borrow or lend from friends when you are younger – both parties are still learning the ins and outs of dealing with money issues, and usually the amounts are somewhat small. This changes, of course, when everyone “grows up” or enters their 30’s and beyond. Singles become couples, kids show up, etc. I believe this story outlines the ideal way to handle loaning money to a friend: talk it over with a significant other, forget the contracts, and think of the loan as a “gift”. Apparently it worked: the friendship remained – the biggest priority.… Read more »

Tim
Tim
9 years ago

I think you and your husband did it exactly right. I’ve never loaned more than $100 to a friend, but in every case I felt that it was money I could “afford to lose”. With that attitude you don’t end up harboring resentment if you don’t get repaid.

It’s also important to make clear that your loan/gift is a ONE-TIME event, to cover exceptional circumstances.

Money Smarts Blog
Money Smarts Blog
9 years ago

@Elle – You say you are going to pay it forward. How about paying it back? Your friend is out $500!

Mom of five
Mom of five
9 years ago

#20 E –

I can’t speak for everyone else, but everytime we’ve been asked for a loan, we’ve told the recipient we didn’t expect to be repaid. Sometimes that sentiment is met with a thank you, but most of the time it is met with, “No, I want to pay you back.”

HollyP
HollyP
9 years ago

I witnessed a situation which made me think twice about referring people for a job. Would you be willing to give the friend a reference or hire him if you knew there was a good chance it would go horribly wrong?

This is what happenned to two of my friends. My friend John was out of work. Our mutual friend Dan was a manager of a business and offered John a job. JOhn lied on his job application, relative to previous criminal infractions. It turned up on a criminal records check, and that reflected poorly on Dan.

Spedie
Spedie
9 years ago

I bought a car from my step brother once for $1000 and made $100 per month payments – ended up paying it off early and never missed a payment. It worked out well for both of us with no hard feelings. I had one friend who borrowed $500 from me, paid it back, in full, two weeks late, but paid it all back. I have loaned my mom money once. She paid it back the next paycheck. Mom is a budget machine, and in her older age, had forgot to pay the life insurance bill. It wasn’t a large amount… Read more »

Andrea
Andrea
9 years ago

30 years ago, my sister asked me for a very large amount of money- $25,000(basically most of my savings) so she could buy a house. Her boyfriend told me that it would be a big tax break for me. I went to a lawyer who said a) there was no tax anything for me b)never lend family or friends money if you can’t afford to write it off as a gift c) there willl be unhappiness(he was also a friend- but Ip aid for this consult). I didn’t lend her the money and she couldn’t buy the house. I also… Read more »

retirebyforty
retirebyforty
9 years ago

Yeap, give it as a gift and don’t expect to see it again anytime soon. I give money to my mom because I know she is financially responsible. I don’t give to my dad. 🙂

Geek
Geek
9 years ago

Egad, you people are all so generous…

I just don’t loan money beyond lunch and drinks (which are usually paid back by other lunch and drinks). But now I feel a bit stingy 🙂

smirktastic
smirktastic
9 years ago

We loaned money to my BIL and his girlfriend two different times. Both times it was between $200-300, both times we were repaid in less than a week (along with a warm note thanking us for the help.) In that situtation we didn’t hesitate becuase we knew it was not a symptom of ongoing money troubles.

Loretta
Loretta
9 years ago

Look at it as a gift not a loan, and suggest a non-money way they could pay you back if they want to. Fix a gourmet meal for you and your honey onyour anniversary every year, watch your kids so you can take that night class you always wanted, ect… Some favor that you would only ask them, that would somewhat equal the amount of the loan. Then you are both happy. I was asked for a loan by my best friend a couple of years ago. She was desperate and crying, and not the kind of person to ask… Read more »

the other Tammy
the other Tammy
9 years ago

I had to borrow money from my parents when my husband left his job and started his own company. At the time we had 2 car payments and couldn’t manage them both, but we needed the cars in order to keep both our jobs. My parents offered to let us use their Home Equity Line of Credit to consolidate the car debt. It has helped us immensely and we dutifully pay every month…not as quickly as I would like, but it WILL be paid off. The cars would have been repo’d or sold otherwise. I am thankful that my parents… Read more »

Jonathan
Jonathan
9 years ago

My wife and I loan to and borrow from family members all the time, always at 5-7% interest with monthly interest-only payments made. It works out great for everyone involved. For example, while we are saving up money for real estate investment, we loan it to her father’s business to pay down a bank line of credit, for which he pays us the same interest rate he’d be paying the bank. We can get the money back almost instantly (by him redrawing from the credit line) and in the meantime we’re making a few hundred dollars a month interest.

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