Lending Money to Friends and Family

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Last updated on February 26, 2013 Views: 547 Comments: 18

I try to keep the issue of money out of my personal relationships. Many people I know outside of those I know only online — my friends and family — read Consumerism Commentary. For the most part, they’re not interested because, I assume, they’d rather keep the issue of money out of our friendships — or they’re just not interested in the topics. Money is not exactly a comfortable topic, particularly when the discussion treads on the more personal aspects, like income, bank account balances, and spending.

Discussing money is usually not a problem once people are open to it. There is more danger when it comes to entering in financial relationships with the people with whom you have personal relationships. For those of us who have an innate desire to help others, it can be difficult turning down a request for a loan, for example. Many years ago, I found an apartment and roommate on Craigslist in order to live close to my job at the time. It was a tiny railroad apartment, but it was a good deal. I was only recently beginning the reconstruction (or initial construction, more accurately) of my finances, and it was the best offer I could find. Only a few months into the arrangement, my roommate needed to borrow money for the rent. I don’t think she had family in the country, so I know she was having a difficult time. I lent her the money.

Although she repaid the loan in full only a few months later, it was after I had moved out of the apartment, and I believe she borrowed the money from someone else to pay me back.

Other people have had worse stories to share. Friends and relatives disappear when they can’t repay the loan. There is a dispute and neither party communicates with the other again.

If you’re lucky to be in a secure enough financial position to loan money to a friend or relative, would you do it? Here are some thoughts to consider.

1. Has he researched other options? Getting a personal loan from a bank or credit union could be difficult, but it’s a starting point. For those who have no luck inside the mainstream financial industry, there are outsider options, though peer-to-peer lending is hardly an outside business at this point. Prosper and Lending Club come to mind, but I know from personal experience that not everyone who needs assistance will qualify for a loan from these places. Nevertheless, research should move from banks and credit unions to peer-to-peer lending before he approaches friends and relatives.

2. Is there any other way you can help? Money may be the root cause of his need to find a loan, but there may be other ways to help him solve this issue without resorting to a financial transaction. If he’s out of work and looking for a job, maybe you can help introduce him to relevant contacts or perhaps arrange an interview. While you don’t usually want to tell your friend how to spend his money, you might want to subtly guide him on a helpful path.

3. If you lend money, will he repay? My suggestion is not to lend any money you can’t afford to lose. A loan is often just a Band-Aid, a temporary fix that won’t fix the larger issue. You may not want to extend a loan if it looks like there is little hope of him paying back. If that is the case and you still want to help, consider offering cash as a gift without the need to repay. If that idea makes you feel uneasy, you probably shouldn’t lend the money, either; without prospects, it’s unlikely he’ll repay you for a long time. If it’s clear his financial is only temporary and you believe he will be cash flow positive soon, you might feel more comfortable providing the loan.

4. If the transaction goes sour, will your relationship follow? Even the strongest relationships dissipate over money. It’s probably easier to replace money in your bank account than it is to replace a life-long friend or a supportive relative. Carefully consider whether the risk is worth the little interest you may receive from the loan.

5. Will you be offended if you don’t believe he’s using your money properly? If you lend money, resist the urge to dictate how the money should be used. I understand that a lender may want to see the money be put to good use. This money should be helping the person become financially independent, either once again or for the first time. You don’t want to see him driving by in a new car or touting the latest iPad 2 the day after you provide the money. Once you sign that check, hand over the cash, or send money through PayPal, it’s no longer yours. You’re entitled to repayments over time plus interest, but you can’t dictate how the money should be used. If you don’t feel confident that he will use the money wisely, don’t provide it.

6. Set a fair interest rate. The purpose of lending money to your friend or relative is not to earn interest on the misfortune or bad choices of others. Resist the urge to punish your friend, the borrower. It’s a good rule of thumb to charge interest at or lower than the rate you could earn in a high-yield savings account. If your money were not to be lent, it’s likely it would be sitting in a savings account anyway. The only reason to lend money to a friend is to help in a time in need, not for profit. If you feel you must charge interest, be fair. It may not be legal to set high rates for personal loans, so make sure you’re aware of the laws in your state.

7. Can you afford to lose the money? In the worst case scenario, you never hear from the borrower again. The relationship is destroyed and you never receive your money back. Aside from the risk to your emotional well-being, can you afford to lose the money? Assume you were providing this loan as a gift, with no expectation of having it paid back. Would you still provide the same amount? Only part with the amount of money you’re willing to never see again. If he does repay the loan, it will feel like a bonus.

8. Make it legal. If you still believe lending money to your friend or relative is worth the risk, draw up a contract to formalize the arrangement. For $14.99, you can buy a promissory note from Nolo, which will allow you to fill in the pertinent information and have a legal contract ready to be signed by you and the borrower. Using a contract helps to signal to the borrower that you’re serious about the arrangement and expect to be paid back, and that perhaps you’re willing to take legal action if you’re not paid. In the back of your mind, though, you might still be under the assumption that this is money you could lose. If the thought of taking legal action against a friend makes you wary of lending money, consider offering a gift or not helping financially.

Would you lend money to a friend or relative? If you have, what have your experiences been?

Article comments

Anonymous says:

If you can afford to never be repaid, then consider it a gift and lend away. My experience has been that a lot of people who borrow money from friends/relatives resent the lender for not “giving” them the money and expecting to be repaid in the first place. They seem to think if you had the money to lend, then you had it to give and should have just given it to them without expectation of repayment. They don’t consider the lender’s circumstances or the possibility that the lender is putting the amount on a credit card or lending money set aside for one of the lender’s bills that is not yet due, and so on. If the money is truly for a need, make the money a gift and pay the utility company, store, or other creditor directly. If it is a want and you simply cannot say no, make sure you have a contract and the proper paperwork. If the loan is not repaid and you’ve made reasonable attempts to collect, you could consider writing it off to bad debt on your taxes and getting some of it back in the form of reduced tax liability. That’ll make you feel a little better about being burned. It worked for me but ironically the borrower who OWES me is still carrying a grudge because I tried to get repaid and wasn’t more understanding about the fact that they had real bills to pay.

skylog says:

unless there is a true life and death situation within a very small select group of friends or family, this is something i will never do again..for both financial reasons and for relationship issues.

dawgette says:

It is better not to lend money to friends and family. If you do lend the money and it is not paid back then it was a gift and lesson learned.

gotr31 says:

I have never had to deal with this and hope I never do!

4hendricks says:


Cejay says:

I loaned money to a brother years ago. It was a semi emergency situation and my Mother was hounding me. I put the expense on my credit card and he offered undying gratitude and lots of promises to pay me back. I never, ever saw a penny of the money and since I did not have enough to the credit card off in one payment I ended up paying the initial balance and the interest. What hurt most is that from then on if I came in the front door he went out the back. Family members started having to juggle how to get us both at a family even and have us not meet. I got pretty mad about the whole situation. From then on I never lend money. I have to think about it as a gift if only for my only sanity.

Sarah says:

I’ve never had any family or friends ask to borrow money. If they did, I’d probably try to help them out in some way, possibly *gift* them a small amount of money, but I would never lend out a large amount of money.

In fact, I try to set aside a little bit of money every month just for helping out family. It’s only $20ish here and there, but that way if they’re in a sticky situation I have the money already sitting there waiting to help them.

shellye says:

I’ve been burned a couple of times, and learned the hard way to never loan anyone money unless you are ok with never seeing it again. I have a former relative (by marriage) who is a FINANCIAL PLANNER yet doesn’t have a dime saved for retirement, and is on the brink of losing his house month after month. Yet he always finds time for long weekend getaways to various locations and overseas mission trips. If they came to ask for money, I’d buy groceries or pay a utility bill for them instead, but never give them cash. Might as well just light a match to a $100 bill and watch it burn.

Anonymous says:

Depends. Which family member? What are their circumstances? Is it a need (food, water, shelter) or a want (a new car, a vacation). I’d as soon give my family most of my savings than see them in true hardship, danger, or potentially harmful emergent conditions, but I’m not giving a loan to enable anyone to live beyond their means as a consumer.

Anonymous says:

I do not loan money because I hate to ask for it back. For me, it is rare that people who borrow money from me return it when promised. I find it very uncomfortable to ask for it. Perhaps, that is one of the reasons, I don’t carry cash! I have made exceptions in the past for my own children and they have not let me down.

tbork84 says:

I have a rule to not lend money to friends, and for family I consider it a gift. If they are able to pay me back, then even better. The key is to know what I am able to help with and still be stable myself.

Anonymous says:

I’ve lent money to 2 very trusted friends who I know to be responsible, and was promptly paid back: the key was that prior to the lending, we worked out a monthly repayment plan.

My boyfriend, on the other hand, has lent money to friends who haven’t paid him back in years.

tigernicole86 says:

I’ve learned in the case of my family to never expect the money back. As a kid, I helped pay for the household necessities such as toilet paper and milk. My parents said they would always pay me back and they did help pay my way through my freshman year of college. However, with these types of loans, I’ve just learned to either say no or just give it as a gift that was I would write the money off. If I was paid back within a nice time frame, awesome. If not, then I helped and I’d let them know I couldn’t next time.

rewards says:

Agreed. I treat personal loans like gambling. I only lend out what I’m fine with never seeing again.

The Latter-day Saver says:

Speaking of gambling, I once loaned my parents over 4k to help them get current on the mortgage and escape foreclosure and to settle up with a payday loan company all because they couldn’t control the urge to “gamble the rent money” and hit the big one. I still have not been paid in full and it has been years now. They still gamble, too! I will never “loan” money to family again. I probably won’t give money to family either, until I get over my bitterness of being burned.

rewards says:

Alternatively, you can view personal loans as charity. You don’t expect your money back from a charity, but you do hope that the charity uses the money in the best way possible. So perhaps treating personal loans in the same way you treat charities might get you through the bitterness?

Ceecee says:

It is interesting that the few people who have asked me to lend them money always made a lot more $ than I did. It was a question of poor management. Once I said yes and got burned, after that I swore off lending money. It steams you when you see someone who owes you money going out to eat and drink every other night.

Anonymous says:

I did it for a friend years ago. Never again.

I would rather direct them to a P2P lending company like Lending Club. I could give them a decent sized chunk of loan via that method. It is much more legal, and you have less risk in case they default.