Should You Loan Money to Family or Friends?

by on October 22, 2012

Taking “Personal Loans” to a New Level:  Should You Loan Money to Family or Friends?

Money is tight all over, and maybe you know someone in a financial pinch. Perhaps he or she has been turned down already for a loan or line of credit and –wisely- want to avoid the high interest fees of using a payday advance service. Your kind intentions may impel you to make a loan, but mixing business and personal relationships can be a very delicate practice. Done right, it can foster trust and goodwill, but more often such deals go astray and leave bitterness on both sides. Here’s how to handle the potentially sticky situation when a friend or relative asks you for money:

Red Light – Don’t Lend to Family and Friends if…

Before you fork over any cash, know the borrower’s financial habits. If the borrower has a history of irresponsible spending, loaning them money is enabling a bad habit that will cause resentment and worsen the situation for both parties. Only consider making a loan if you know that the person is responsible and is just temporarily down on his or her luck.

should you lend your friends money?If you feel obliged to help out and can afford it, make a one-time financial gift and write it off. If you don’t feel confident making a loan, don’t cosign on one either. If the loan you cosigned goes into default, you are responsible for repayment, and no one wants to repay someone else’s debt. Many people feel that they can’t say no for fear of damaging the relationship. Saying “no” won’t damage the relationship, it’s how you handle the situation after “no” that matters. Explain that you don’t want to ruin a good relationship over money and its complications. Check in once in a while to see how he or she is doing, offering a sympathetic ear or any help you can give. Consider offering non-financial assistance; a home-cooked meal, transportation, help finding a new job or occasional childcare can be more valuable in some circumstances.

Green Light – You Should Lend to Family and Friends if…

If you do decide to make a loan, you can keep it on track with communication and upfront terms. First of all, take time to discuss the details of the finances; examine the budget, consider cutting some expenses and look for additional sources of income. These steps may mean a loan isn’t necessary after all, and either way it establishes good habits that will ensure repayment and financial security later on. Next, lay out terms clearly and specifically in writing to avoid confusion, miscommunication or disputes. Set up a repayment plan, including when repayment will start, length of repayment and whether or not interest will be added. You may find that using a free online template to write a formal legal document works best to ensure that all the details are covered.

Making a loan to a family or friend means not only the business risk that the borrower will default but also the personal risk if the relationship goes downhill with the unpaid loan. If you trust the borrower and feel that you can help, make the loan with clear, written terms. Otherwise, you must be able to say no to someone you love who is fiscally irresponsible. As difficult as it may be, it’s the best choice for them and for you. After all, when it comes to money, it’s nothing personal.

Care to share your thoughts about loaning money to family and friends?

{ 9 comments… read them below or add one }

PurpleRose October 28, 2012 at 9:52 pm

I can relate to this article in that I have a friend who has loaned so much money to family and ex-wives. The BIG problem is they never pay him back. This is such a shame!

Your article sheds some light on when you should and should not make loans to family and friends. If you treat these situations much like business, then you can make more proper decisions in loaning out the money.

Would the bank loan a certain number of dollars to them? Why or why not? It is one thing to be able to help and it is another to be taken advantage of.
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Kitts October 29, 2012 at 3:05 am

I think it also depends on the reason why they need a loan from you. If it has to do with medical expenses , I can understand. If it has to deal with someone not wanting to get up and get a job, well then they wont be getting any help from me.

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Kristine November 7, 2012 at 6:41 am

I’ve done so in the past but if it could have been avoided I would definitely have considered other options. I think that keeping a relationship intact is far more important than anything so it’s a must to be true to your commitment by paying back in a timely manner. Thanks for sharing!

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Abhishek November 15, 2012 at 3:52 am

Lending money to family and friends is OK to the extent that they don’t make it a habit. I also agree when you say that their financial habits need also be checked. It should not affect your relationship with the other person. Thanks for sharing these points.

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Michael Belk November 18, 2012 at 6:07 pm

I am not a financial adviser, but I subscribe to the fact that it is better to give money to family than to loan.

You are not being harsh because when they can not pay it back you are creating enemies. I listen to Dave Ramsey every now and then I hear nothing but grief from people expecting more from family.
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Wayne Adams January 17, 2013 at 3:35 pm

We talked it through, but I honestly think she’ll keep bailing family out. She has a generous heart and I hope she learns that helping family doesn’t always mean loaning money. I want to share a few thoughts on the topic; hopefully it can benefit others.
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Otis I. Stone February 2, 2013 at 2:03 pm

Lending money to a family member is one of the quickest and surest ways to damage your relationship with that person. If the person can’t or won’t repay the loan, you’ll begin to resent him. If the person is a member of your side of the family, your spouse may begin to resent you. If you start to pressure the person for the money, he will avoid you. Other family members can become unwittingly caught in the middle, and before you know it, family gatherings become rife with tension.
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CS-guy May 15, 2013 at 7:35 pm

If someone is in a tight enough position, family or not … they will likely misrepresent the actual situation. Be aware of this.

If someone asking for money, is more self centered than average … their concern is only for themselves … they are not really concerned about losing the money or not paying it back.

You won’t know, the true character of a person, until it is tested … any other believe about their character only exists in your own mind.

What people consider “excess” money or money not needed in the short term differs from person to person. For instance, you may think loaning someone 10K for a short term, when you only have 20K, and you have an income is using “excess”. … … The person you’re loaning it to may only consider paying the money back when they have 100K.

People have different relationships with money. Those that spend a lot, on the extras … are usually the ones borrowing money from those who are better at making reasonable sacrifices to save money.

I think you need to spend some time examining how the person wanting to borrow money, spends their money. For instance: If you’re driving second hand cars, eating less expensive, but healthy foods, living in home/rental a little bit beneath your means, etc. Essentially making wise monetary decisions .. AND the person needing to borrow is not living a similar way .. then loaning money just means you are giving away the sacrifices you made, to someone else not making those sacrifices.

Keep in mind that lots of people feel entitled .. they don’t truly understand why they can’t have things some other people have. And they feel resentful about it. What they also fail to understand, is a lot of people with those things are still living beneath their needs.

Family, in financial crisis, is a hard one to avoid loaning money to. So you have to decide what the level of crisis should be before you get involved. Keep in mind, some people believe having to downgrade to a smaller home, use cheaper cars, cut entertainment expenses by half ,, because the economy has taking a dip … in a crisis. –ME. As long as you have a roof and are eating with at least some income … it is NOT a crisis yet.

HERE IS WHAT YOU SHOULD KEEP FOREMOST IN YOUR MIND. When lending money to family .. would they do the same for you?? … That’s an important question, because when you loan money you are NOW tying your finances together .. you are creating a dependency. Should you need their help would they be there?? … AND would they be there at the same level??

Also important to determine the level of sacrifice they would make for you. For instance, you may decide to delay or cancel trips, delay getting a newer car, cut your entertainment expenses etc. BUT for some people, these would be considered must have items and certainly would not sacrifice them.

You can create a lot of problems for yourself loaning money to family. AND you cannot undue that damage. AND that damage can be life changing.

YOU have your own life to live. If you are fortunate enough to have money to give away, hey that’s great. But if you are like most people, you can always find a use for more money to improve and enjoy life.

Unfortunately money is too important for many aspects of life and money can easily be equated to having a good life. Think twice before giving away, part of your life.

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Bonnie Webdale July 9, 2013 at 3:41 am

Although I’m late to the party (apologies), I’ve been researching this and there are some interesting points raised here.

Money always causes stress and you never know what effect it will have on a relationship when you bring money into the equation.

I’ve just written an article about guarantor based loans as an alternative – this is where a lender lends the money and a friend backs the application (although they are bound into the agreement if the applicant fails to pay). Now, you can get similar problems with a guarantor loan, but the money isn’t lent directly from your friend/family – it’s just supported by them. The question is whether that helps to avoid tensions or just creates new ones.
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