To Lend or Not To Lend

03/18/2010 05:12 am ET | Updated Nov 17, 2011

'Tis the season to be borrowing. Or lending. A recent New York Times survey finds that more than half the nation's unemployed workers have borrowed money from friends or relatives since losing their jobs.

The go-to source for advice on lending to friends is, of course, Polonius, the windbag courtier in Shakespeare's Hamlet who famously admonishes his son Laertes to "Neither a borrower nor a lender be" because "loan oft loses both itself and friend." (Polonius is less famous for one of Shakespeare's more prescient lines about friendship: "do not dull thy palm with entertainment... Of each new-hatch'd, unfledg'd comrade." Translation: forego Facebook. Twitter, however, would presumably be a go -- earlier in the same speech Polonius opines that "brevity is the soul of wit.")

But Polonius is only half right where friendly loans are concerned. Granted, lending money to friends can be a bad idea under most circumstances -- substance abusers, gamblers and compulsive liars need not apply. But in these horrific economic times, why shouldn't one fortunate enough to have a few dollars be there for a friend in need?

Since the recession hit with full force in 2008, I've made two loans: One to someone whose meager income from singing in restaurants and on the streets took a major hit; let's call him DPT (Dirt Poor Troubadour). The other -- whom we'll call DG (Development Guy) -- is one of those Hollywood writers who's earned millions on projects that never made the transition from his computer screen to the big screen; DG was in desperate straits because his lavish spending had far exceeded his lavish income.

When their loans came due, neither was able to pay. Inspiringly, DPT -- who once served hard time for robbery! -- committed to a payment plan. It took over a year, but, putting together a little at a time, he repaid the loan in full. As for DG, well, if I had a penny for every time he solemnly swore to pay "by the end of the week," "very soon" or "in a few days," I'd be rich enough to lend without thought of repayment. But few of us are so well-off, so herewith my top ten red flags:

1. The more florid the borrower's promises, the less chance he'll repay. (I say "he" because every time I've loaned money to a woman it's been paid back in full and on time).

2. It's not a positive if he knocks on your door less than five minutes after you've said "Yes," indicating he'd been calling from your neighbor's bushes.

3. Beware of the narcissist quoting spiritual texts about past lives or other cosmic ideas. When he says, "The gods will reward you for this," he really means, "I, who consider myself to be God, will smile upon you if you give me money and go away."

4. If you ask for collateral and he tells you he's already pawned his kids' toys, just say "No."

5. Documentation can't hurt, but watch out if the borrower shows up with a mountain of promissory notes and loan agreements. If he bails, these documents are virtually meaningless for amounts of a few thousand dollars or less: the time, energy and money it would take to win a judgment would be prohibitive. And even if you win you'd likely have to get in line behind more muscular creditors like the IRS.

6. A post-dated check may feel substantial but it means nothing unless he has the loot to cover it.

7. It's a bad sign if he tells you he has a contract with the government of Turkmenistan and will repay you the minute he gets paid. If his evidence includes purported emails from high Turkmeni officials -- high on what, you may wonder -- it's a very bad sign.

8. It's even worse if, when you sheepishly ask for a copy of the contract, he assures you that it's an "ironclad handshake agreement with a stand-up guy."

9. Be scared, be very scared if -- after encouraging you to "stay close" -- he reveals he's changing mobile phone companies and "transitioning" apartments.

10. Do not under any circumstances proceed if you hear the words "Trust me" or "It's not about the money."

On the other hand, if your friend is humble, doesn't flatter and, most important, if not getting repaid for a while -- or maybe ever -- won't break you, go for it. You might just be making the world a better place.

Polonius ends his monologue -- which, by the way, you can get as a ringtone on your cell, with advice that provides a context for everything else: "This above all: to thine own self be true...Thou canst not then be false to any man." Sometimes being true to yourself rightfully includes being a lender or even a borrower. The trick is distinguishing a true friend from a "new-hatch'd, unfledg'd comrade" before it's too late.