How to Lend Money to Friends and Family

When it comes to loaning money to family and friends, my advice is simple: just say no. The risks and challenges of lending money to friends and family outweigh the benefits of that loan. This isn’t to say that you shouldn’t help family and friends in moments of need, but that a traditional loan structure is not a wise choice.

Let’s dig into the reasons why a typical loan to a family member or friend is a bad idea, and what other options you have if you want to help out a family member or friend.

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In this article

    Why loaning money to family or friends is a bad idea

    First of all, lending money to someone is a financial risk. Lending institutions mitigate that risk by doing a credit check and looking into your employment history. With family and friends, all that you really know about the other person is what you’ve been able to see. You don’t know if Cousin Ed fails to pay his bills fairly often and has bad credit, or your best friend Carol has a huge amount of credit card debt. That means that simply lending money to people without things like looking at their credit history is a financial risk.

    Beyond that, the core problem with loaning money to a family member or a friend is that it changes the relationship between you from family or friendship to that of a lender and a borrower. Let’s be frank — no one wants to hang out with their loan officer.

    If you’re borrowing money, the relationship becomes tinged with a sense of obligation to repay and significant strain if you can’t repay in the terms that you arranged. It’s not so bad if you’re moving in a direction to easily repay the loan in time, but if you’re not, it can put you in a position where you may want to start avoiding the person you borrowed money from.

    [Read: Best Personal Loans in 2020]

    For the lender, it’s even more challenging.  Again, if repayment goes perfectly according to plan, there’s no problem, but it is uncomfortable to spend social time or family time with someone who has neglected a promise to repay you. That relationship you have will naturally sour. The lender may end up in a situation where they have to start “nagging” a family member or friend for repayment, which is uncomfortable not only for the two of them but for mutual family members and friends.

    Furthermore, the relationship between you — and often amongst mutual friends and family members — is at risk of crumbling if the loan is simply never repaid.

    Basically, the real risk for both lender and borrower is the relationship they share. For the lender, the primary reason they would even consider the loan is because of that close relationship, and losing that relationship is likely more costly than the value of the loan. For the borrower, they’re risking that personal relationship that matters so much to them if they can’t repay. Add these together and it’s rarely a good idea to lend money to a family member or a friend.

    So, what’s the solution here? What do you do if you want to help a family member or a friend, but a loan is a poor choice?

    How to help family or friends without being their lender

    1. The first option to consider is to simply make the loan into a one time gift instead. Simply give them the money with no repayment strings attached to it whatsoever, but make it abundantly clear that this isn’t going to be a repeated thing. Tell them not to ask again for a long time. Then walk away and forgive them completely for their future choices. You gave them what they needed to solve their immediate problem. This is a good idea if the amount is small and it’s for a sensible reason.
    2. Another option is to find non-financial ways to help them with their current struggle. Offer to drive them to work, rebuild their resume or let them sleep on your couch for a few weeks.
    3. If you know of a job opening somewhere, let them know and offer to help them apply.
    4. On the other hand, if you have the means to pay them for work, assign them a task like helping you install a new patio or renovate your kitchen. In this case, you become a client to them and not a lender.

    The truly valuable part of finding non-financial ways to help is that it leads to a meaningful conversation about what the problems actually are that are leading them to need to borrow money from you.  Finding non-financial ways to help actually builds relationships rather than putting them at risk, as lending money often does.

    There are situations where the need to borrow money from you stems from a personal problem that they may not want to discuss. Someone might want to borrow money from you because they have a problem and it’s something they’ve worked to keep secret from everyone, but they’re running out of ways to secretly manage it.

    If a person is willing to open up to you about a deep problem they’re having, such as drug addiction or gambling addiction, help that person in ways that don’t involve furthering that problem. First and foremost, listen. Don’t just interject what you think the solution might be. Listen and try to understand their struggle. Be someone they can lean on for a bit. If they’re willing to seek help, assist them in finding lasting solutions for their problems.

    What if you loaned someone money and they simply won’t pay you back?

    Often, people lend friends or family members money, only to later discover that the person they loaned money to seems to have no intention of paying them back. That’s a difficult situation to overcome. The trust in that relationship is now eroded. What do you do in that situation?

    First of all, if you can financially do so, forgive the loan for now. Don’t tell them that you’ve forgiven the loan, but come to the understanding within yourself that you no longer expect them to pay you back. That money is gone; it’s now water under the bridge. There is no longer any need to bring up the loan with that person ever again. It’s gone.

    If you can’t financially afford to do so, your only route to recouping things is through legal action, which is unlikely to succeed unless you have clear documentation of the loan and is likely to permanently damage the relationship.  Understand that risk before you pursue it – you’re likely to walk away without any money, without that relationship, and with potential legal bills.

    [Read more: Quick Personal Loans: Best Fast Cash Lenders]

    Once you’ve accepted that and forgiven the loan, decide whether the relationship is worth salvaging. Do you still want to have a good relationship with this person? Or are you fine with letting the friendship dwindle or keeping the family member at arm’s length? That’s an internal decision you need to come to, depending on how important that relationship is to you. One point of advice: sometimes people simply make mistakes. They may grow and change and become far more trustworthy than they once were. The college kid who borrowed money from you at age 19 and didn’t pay you back might be a very reliable person 10 years later. Sometimes, as those people grow, they come back around and repay the loan on their own terms. That is a strong sign that the person is trustworthy and that you should put in the effort to rebuild that relationship.

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    My general advice is this: if it’s a family relationship, keep them at arm’s length for a while, but give it some time and see how they grow. You may see growth in that person and the loan was a low point for them, or you might eventually learn that they’re not trustworthy and you should keep them at arm’s length. In either case, unless there is a deeper problem than an unpaid loan, don’t cut that person entirely out of your life or the family circle.

    On the other hand, if it’s a friend that hasn’t repaid you, keep the distance and seek to build other friendships. The bond of friendship is one largely built on trust and mutual interest, and if you don’t have that, what do you have? This doesn’t mean that you should slam the door on them, but rather seek to invest your time and energy into other friendships or into seeking new ones.

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    Trent Hamm

    Founder & Columnist

    Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.