Updated on 11.12.11

How to Loan Money to Friends and Family

Trent Hamm

One of my basic rules of personal finance is never loan money to friends or family. It creates a lender-borrower situation that you just don’t want to mix with friendships and family relationships.

Think about it this way: do you like your mortgage holder? Do you feel warm, friendly feelings about them? That’s the result of a lender-borrower relationship and when you lend money to friends or family, that’s what you add to the equation.

Yet, time after time, I get messages from readers who seem completely convinced that lending money to their friends and family is the right way to go. They’re going to do it, no matter what I suggest, because there is some social reason why they believe it’s the right thing to do.

I absolutely believe loaning money to someone is a horrible idea, but if you’re going to do it, here’s how I would go about that process.

First, assume you’re not going to be paid back. From your eyes, think of the money you’re lending as a gift. A very high portion of personal loans are never repaid and if you expect to be repaid, you’re going to be disappointed and you’re going to start injecting negativity into that relationship. Be aware of that right off the bat and don’t expect to be repaid.

Hand in hand with that assumption is the realization that you should never loan money that you’re going to need in the future. If you’re going to need that money to survive, don’t lend it, period. Only lend money that you could live without – money that would ordinarily go to non-essential items.

When you loan the money, make it clear to the person that you’re not worried about when you’ll be paid back. Make it clear that they can repay you on their own terms, because when you start setting terms, you’re creating a relationship-damaging lender-borrower situation. Let them pay you back when they can.

At the same time, make it clear that you won’t loan to them again until this is paid back. You do not want to become a well of support. A loan is just that – a single shot of money intended to help them right their ship again. You are not a means for them to get by. You are not a method by which they don’t have to start taking responsibility for their actions.

Once you’ve loaned the money, don’t bring it up. In fact, the best thing you can possibly do is just to completely forget that you’ve loaned any money at all. Since you’ve not set any terms on having them pay you back, simply allow them to figure out their situation and come up with a repayment plan. If they don’t, well, you didn’t expect to get the money back anyway.

If they ask for another loan, say “no” unless you’re really willing to give up more money. If you do say “no,” simply point out that you previously told them that you would not loan them more money until the earlier loan was paid back. This is an easy and very clear response, as it puts the onus of trust onto them, not onto you.

As I said at the start of this article, this advice only matters if you’ve decided to loan money anyway, even though I generally consider it to be a really bad idea. If you’re considering loaning money to a friend or family member, please think it over carefully before doing so.

I have made the mistake of lending money to family and friends in the past. Eventually, I had to accept that this money was simply gone. If I had accepted that idea from the start, I wouldn’t have damaged any relationships in the process. Instead, I could have continued to be a part of their process of fixing their life.

Don’t let money get in the way of your friendships or family. Avoid lending money if you can, and if you must, make it as unintrusive as possible.

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  1. MP3 says:

    I so agree. If you are going to loan money to family and friends, think of it as a gift, never loan money if you don’t have it to loan and aren’t willing to accept it may never be repaid.

    My mother once loaned me money for a car so I could avoid a high interest rate, but she became so obsessed with making sure I paid her the money regularly (which I did, never missed paying her each month) that she would begin every conversation with it. I ended up going to the bank to get a loan to pay her off in full, because having her start every conversation with the amount I owed, and how much interest she calculated on it was getting tiresome and affecting our relationship negatively. Ever since then I have neither borrowed money from family nor lent money to family.

  2. Kate says:

    Issues around loaning money can really damage relationships when it is lent due to a request or offered, without a request in an effort to “help”.

  3. Hillarie says:

    I recently loaned a little under 1K to a friend and I am in agreement with you 100% on your points. It was not a financial burden to part with the money. I do think the friend will repay me, but we didn’t set a deadline and if I don’t get it back, I will not be bothered. I also know that there are perhaps 3 people in this world I would loan money to like this, and this friend is one of them. Anybody else would just get told No.

  4. Johanna says:

    Has anyone ever followed this advice and had it work (for amounts of money more than, say, $10 to cover lunch)? It seems to me that many of these bullet points could have come from an article called “How to loan money to friends and family, if your goal is to have the loan end in heartache for everyone involved.”

    “Assume you’re not going to be paid back (but don’t say so)” is all well and good as far as your point of view is concerned, but think about how it looks from the borrower’s point of view. *They* think you expect to be paid back, but they have no idea on what terms (because you haven’t said anything about that). From that point on, every interaction they have with you is going to fill them with dread, because they’ll imagine how disappointed you are in them for not paying you back (or for not paying you back more quickly, if they are paying you back).

    If you’re really thinking of the loan as a gift, just make it a gift from the outset, and don’t play games about it. But we don’t really need an article about “How to give money to friends and family.” (Or maybe we do, but it would be a very different article from this one.)

    As I’ve said before, I think open communication is absolutely essential. For seriously large amounts of money, you’ll want to draw up a legally binding contract, but for smaller amounts of money, at least have a serious chat about what both parties’ expectations are.

  5. Riki says:

    Tell the borrower to repay on their own terms? Don’t mention it again?

    This is advice that will guarantee resentment and disappointment. You can’t give money and call it a loan but think of it as a gift. If you want to make it a gift, make it a gift. If it’s a loan, then clear terms need to be outlined and put in writing. Trent’s advice is confusing the two and that is a recipe for a bad experience.

    I think Hillarie (#3) makes a good point — the lender bears a lot of responsibility regarding which relationships can and cannot withstand borrowing money.

  6. Johanna says:

    (I should add that my parents’ mortgage holder was my grandmother, and they continued to have plenty of warm, friendly feelings for each other. So no, the lender-borrower relationship is not incompatible with a loving familial relationship.)

  7. Johanna says:

    “the lender bears a lot of responsibility regarding which relationships can and cannot withstand borrowing money.”

    I think the borrower bears the same responsibility – for example, if you think that the lender would have a hard time saying “no” to a loan that they can’t afford or that makes them uncomfortable, don’t ask for money from that person.

  8. Other Jonathan says:

    I’m firmly in the “DO lend money to family and friends” camp – when done under the right circumstances. My family (and some friends) always pass money back and forth, usually requiring interest-only monthly payments (5-6%) and with the ability for the lender to “call” for loan repayment (which the borrower has 30 days to repay). The last part is just for formality/legality.

    The money loaned is always for investment purposes. We are all very comfortable, financially, but sometimes one person has a deal ready but not the cash, so we basically move the money around between people so it can be used most efficiently. I have never seen this cause any problem because there is mutual understanding of the purpose and terms of the agreements.

  9. valleycat1 says:

    I’m with Johanna on this. This article is about how to GIVE money to family and friends. I’d say, if you’re loaning someone money, make it very clear up front that it is a loan and you fully expect to be paid back within a specific time. If you just hand them the money with no expectations outlined, many people will rightfully assume it’s a gift.

    I’d add that if you do give or loan money to someone, be willing to accept that during the repayment period they’ll likely be spending money on things you may not think are necessities instead of throwing any extra at your loan. And keep your mouth shut about that.

    If both parties are responsibly setting up a loan situation [as Johanna said, when the amount is more than a casual amount], the terms are put in writing. Then if a payment is missed, the loaner has something to back them up on asking about the payment. And both parties can keep close track of payments made so it’s clear when the amount is paid off. I gave receipts for every payment on a loan I carried, with the declining balance noted as well.

  10. Diane says:

    I would never loan money to friends or family. Give? yes. Loan? never.

  11. SwingCheese says:

    I also agree with Johanna. If I owed someone money but had no idea of the terms of repayment and was, for some reason, not able to pay it back (or make the payments or whatever), I would start avoiding that person, as I would feel uncomfortable around them. So they might be thinking of it as a gift, and not feel uncomfortable, but because I felt uncomfortable, the relationship would probably end anyway. But if I knew they thought of it as a gift, and I was able to repay them anyway, I’d feel easier around them.

  12. Lesley says:

    Right before I started grad school, my parents loaned me $13,000 to pay off sone debts and buy a laptop (required for my program). We agreed on an interest rate right between what the bank would charge me and what they were earning on the account so it was a good deal for both of us. The other part of the agreement was that within three months I had to make arrangements for the money to be direct deposited from my paycheck to their savings account. This worked out great for both of us, and there were no hard feelings–plus when I hit a really bad financial spot, they gave me a break on payments for a few months. This agreement really helped me out of a jam and they felt okay about it because they earned decent interest. I’ve completely paid them off and we never argued or had bad feelings about it.

  13. Johanna says:

    “I’d add that if you do give or loan money to someone, be willing to accept that during the repayment period they’ll likely be spending money on things you may not think are necessities instead of throwing any extra at your loan. And keep your mouth shut about that.”

    Great big “yes” to this. And I think this is part of a larger point about how setting terms of a loan (or boundaries in general, not just with money) can be freeing rather than restricting. If we agree that I’ll repay you $200 a month, and I do that, then I don’t have to worry about whether I should be scrimping a little more and paying you $300 a month instead.

    At the same time, if the loan has very generous terms (very low interest over a long repayment period, say), I think it’s completely fair for the lender to say “If you get an unexpected windfall (e.g., you win the lottery or get a big promotion), I want us to get back together and renegotiate the repayment plan.”

  14. Emma says:

    What are friends and family for if not to help? How did (do) societies without easy loan systems do? I think that Trant lives in some isolated area. In NYC many cultural groups buy everything by passing banking system. If more families , friends made private loans to each other the whole society wouldn’t be so choked with credit cards and high interest loans). We do make loans , big ones to each other. I was offered 10K when buying house to boost up the credit.Money had to come from the bank account not from a jar under the mattress. I loaned back about 15K when they needed. We all know each other- we all have jobs. Yes, we pay voluntarily intrest or offer a big gift. By the way refusing a loan , turning ones head from a needy friend or family member is just plainly cold and sinful to me. Loaning money can also strengthen the relationships within a group of people, not only weaken it. Look at it both ways. I am taking care of my 86 old aunt in FLA( on distance) because I remember that 3 decades back she loaned money ($300)to my mom , when we needed it. I will watch over her till the end of her life.

  15. PawPrint says:

    My sister and I obtained loans from the Bank of Dad a few times. I always prepared a legal promissory note with interest for both of us to sign. Not sure what my sister did regarding a promissory note, but we both paid him back in full and on time. I’m certainly glad he was there when I needed him.

  16. Katie says:

    This reminds me of an article I read about “ask” vs. “hint” cultures – this article seems very much rooted in “hint” culture, which is not a bad thing, but also not universal.

    I do think that lending money to one’s children or grandchildren for something like a house or a college education is often going to go differently than lending money to someone who’s living paycheck-to-paycheck on a more permanent basis (not necessarily through any fault of their own). In the latter case, the chance are a lot higher that the person won’t have the resources to pay back the loan later either. In the former case, if someone can get a mortgage from a bank they’re probably not a bad credit risk for mom and dad either.

  17. elyn says:

    I think loaning money to friends and family is fine, if it is money you won’t miss. This is different than not expecting it back. If loaning money creates any sort of hardship or resentment, then you aren’t in a position to lend. But if you’ve got it to spare, then go for it. I agree with others that creating parameters around it makes it clean.

    Long long ago, when I was incredibly broke, there were 2 scary months when I couldn’t even pay rent. My sister loaned me 300 bucks one month, my friend Steve loaned me 300 the next. For both of them, this amount was nothing. For me, it was everything. They both knew that it could be a long time before I was back on my feet, but they both made it clear that they expected to be paid back when I was able to do so. It took a while, but I paid them both back, because I absolutely hated the idea of reneging on a debt to people who I care about.

    One caveat about loaning to family or friends: if this loan is more of an enablement that keeps them from getting on their feet, don’t do it. I have a brother who is a compulsive spender and an alcoholic. I will never loan him money because I know he is not in control of it. His money spending issue is so out of control, loaning him money would be about as wise as buying him a case of booze.

  18. Cheryl says:

    We recently helped a friend who was stranded. Paid the money directly to U-haul. She says she will pay it back, but we’re not looking for that to happen realistically.

    Another time, Mom loaned us money to start a business. We signed a promissory note, but after the business was a success, she cancelled the note as a Christmas present.

  19. Steven says:

    I’ve been asked for money by family, as a loan. I gave it to them, making it clear that it was a gift, and I expected nothing in return. Worked out fine, but both parties must understand the terms of the exchange. If you don’t expect to be repaid, make that clear.

  20. moom says:

    I would look at this differently. First assess whether the person will be able to easily repay the money or not. For example, I lent money to a friend so that they could go study in Germany. They were going to get a scholarship but they wouldn’t get the money till later. I knew they could repay me as soon as they got the scholarship and so was happy to lend the money. And it all worked out OK. My mother lent me money another time when I moved country and would get refunding for expenses etc. But if there is no obvious way to get repaid then I would just give the money as a gift and never call it a loan. Calling it a loan and then not being repaid is what is going to generate negative feelings. An option is to get the person receiving the money to set up a payments scheme with their bank so the money gets paid back automatically out of their account. But it only makes sense again to do this if the person’s income will be rising in future for sure.

  21. moom says:

    Yes, I agree with Johanna and Emma etc. I also borrowed money from my Dad when I was in grad school. I did repay him though after a year or so he got an inheritance and decided to forgive the loan. I think this is very culturally dependent but that Trent’s advice will result in problems in any culture as people have explained.

  22. valleycat1 says:

    If you’re loaning money in a sum that’s difficult for the other person to come up with, be sure the terms are to pay the loan off in increments over time, not a lump sum due on x date.

    And no matter how much is loaned, I agree absolutely that the person loaning the money needs to take that money from extra available funds, not deplete their emergency fund or dip into their retirement or other savings to the point they are now (or will be in the future) on the financial edge.

  23. Gretchen says:

    What Katie is calling a hint, I call passive agressive.

    If you want to gift the money, gift it.
    If you think all parties are okay with terms of a loan, loan it.
    If neither is true, do neither.

  24. Rockledge says:

    Well, it sounds like Trent has gotten burned with some loans and so he has a valid point. Me, I think it depends.

    I am OK with loaning money to certain people and expecting it back, my brother and my best friend, and have never been disappointed. If I loaned money to my mom, I’d like it back but it would be money I could afford to lose and not comment on–the same with money I am loaning to my son for college. However, there are some friends and family I would never loan money to and if it caused hard feelings, too bad.

  25. Fawn says:

    My mortage is through my mom. Promissory note, interest at the going rate, etc. Positives about this: mom is making a higher interest rate on her money than if it just sat in CDs. I’ve never missed a payment, but if the Apocolypse occurred or one of my kids needed brain surgery or I was “T-boned” in the car and couldn’t work for awhile, she would not foreclose on me.

    Like a bank, you have to evaluate your lendee.

    But neither mom nor I (or my brothers) think of her loan to me as a gift.

  26. joan says:

    I agree with JOhanna and Emma, I’ve loaned money to both family and friends and vice versa. There has never been any hard feelings about the money. Some ended up as gifts and most was paid back. I know people who wouldn’t consider helping a friend or their family; who give big bucks to charities and brag about it. I believe that charity begins at home. Sometimes the only place a person can borrow money is from a family member or a friend.

  27. Becky says:

    I think this depends very on who you’re loaning the money too. My parents loaned me a down payment for my first house. I paid them back, but not on the initial schedule we’d set up.

    Mom told me that I’m the only family member she’s loaned money to who’s ever paid the entire loan back, though. She followed the method Trent is suggesting, and has never loaned more than she could afford to use.

    I have also benefited from a loan from a friend. We set it up as a peer-to-peer loan complete with promissory note, interest rate, amortization schedule, and payment plan. I set up automatic payments from my bank, so unless disaster strikes I will never miss a payment.

    She helped me out of a tight spot and I am extremely grateful. So far it hasn’t damaged our relationship; I think that as long as the loan gets paid back according to our agreement, it won’t.

  28. Jonathan says:

    I agree with Trent that loaning money to family and friends can often work out badly. However, I do not believe this is always the case. I see no issue with loaning money to someone you trust, as long as there is open communication regarding the repayment expectations. If both parties are not clear on the repayment requirements, however, I can see where problems might occur. I can also see where problems might occur if you loan money to someone is isn’t reliable or who doesn’t consider paying you back a priority. Personally, I would weigh the risks of loaning to family and friends on a case by case basis, and not just apply a blanket approach as Trent suggests.

  29. Johan says:

    It all comes down to how much you trust each other, doesn’t it? Do you trust the other party to pay back the loan with interest – like they would a bank? If not, give them the money, but it does not feel like a very adult thing to do. If you make sure you have all the necessary papers, it makes it easier – as makes lending a lot of money, instead of small sums.
    If you can trust each other is also a matter of how you are raised – if you respect other peoples money, and they know they can trust you with it. Once you lose the relation between work and money, your financial sense is screwed.
    If “Bank of Dad” has a habit of giving microloans and forgiving them, then obviously that will reflect the repayment performance. On any loan you take in the future, be it in Bank of Dad or Bank of America. Because you will think of it is a gift, not a loan. Sounds like a pretty dangerous habit to give to your children, actually.


  30. asithi says:

    I’ve loan to family previously. But it is always a loan with terms of payment. As long as the payment is made, I don’t judge how they spend their money. However, I’ve also given small amount of money to family a gift. I’ve always distinguish between the two. To me, a loan is a loan and and a gift is a gift. I don’t want to enable family members to “borrow” from me, knowing that they do not have to pay me back.

  31. Chris says:

    It worked for us. We had a very good relationship with my in-laws. They have loaned to us several times (up to several thousand), with terms and conditions clear, not in writing though. They would charge us more interest than they were earning but less than we would have paid from a bank. I kept very good records. We have paid off the last loan several years ago. I agree this is probably the exception, not the rule.

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