Should you loan money to friend or family member? It’s a complicated subject. While it’s natural to want to help the people in your life, loaning money has the potential to destroy relationships. Refusing to lend money can be hard on a relationship, too. There are no easy answers.
Think carefully before loaning money to family and friends:
- Only loan what you can afford to lose. The grim reality is that you might never see your money again. You can minimize the pain of default by only loaning what you can afford to lose.
- Even the most responsible of your friends and family can default under unfortunate circumstances. Be prepared for the worst.
- Offer help instead of money. In most cases, providing money only addresses the symptom of a greater problem. Whatever lead to the financial hardship will still be present. Most personal loans aren’t repaid and hard feelings are the result. Instead, offer to help make a budget, find employment, or give advice. Keep your checkbook in your pocket.
- Put everything in writing. Spell out the terms of the loan, including the amount and the repayment details. Putting both your names on the dotted line will help to motivate your borrower to make timely payments.
- For large amounts, consider using a lawyer to draft the final agreement.
- Consider how the rest of your family and friends might react. Have you turned down others for loans in the past? What will those people think if you’re willing to loan money to someone else? Will your loan be viewed as enabling bad behavior, such as poor spending habits or refusal to get a job?
- Stick to cash. Avoid cosigning a loan or a credit card. The poor payment behavior of the borrower could have a negative impact on your credit and ability to borrow in the future.
- Also avoid converting other investments to cash. Keep your loan limited to cash that you already have on hand.
- What will you do if they default? Will you ask for collateral? Are you willing to take the borrower to court? Will you end the relationship? Have a plan for how you’ll handle non-payment.
- Charge interest. Charging interest will help to keep your borrower honest. The situation feels more formal and serious if interest is charged. You’ll also feel better about your money working for you. Charging interest can also avoid being charged with a gift tax. Talk to your tax professional.
- Talk to your partner. Before lending money to anyone, ask for the blessing of your partner. People have differing opinions about loaning money to family members and friends.
- The last thing you want to do is create friction at home. You could be straining your finances and your relationship.
- Be able to say “no.” You have a good idea whether or not the borrower is ever going to pay you back. There are times when saying “no” is the only reasonable course of action. Avoid being afraid to refuse requests for money. Follow your gut.
The decision to lend money to a friend or family member is a personal one. Financial experts have a wide range of opinions on the subject. Avoid lending money you can’t afford to lose. Remember that you can always offer to help in other ways.
Consider the ramifications of loaning money to someone you know well. The potential to ruin a relationship exists. For the best outcomes, always tread carefully and make the wisest decision you can.