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Lending Money to Family and Friends

Written by Laura Martinez - 32 Comments

Lending money to family and friends is a bit like walking a tightrope, and it’s very easy for things to go wrong. With the ongoing recession affecting so many people, you might be tempted to lend money to a loved one in hopes of helping them out. While this might sound like a good idea in principle, doing so can be problematic.

The first step in deciding how best to proceed is to find out why your friend or family member is having a difficult time. If they have a history of being responsible with money and are just experiencing a temporary setback, you might consider helping them out. If, on the other hand, they consistently have trouble with money, you should think twice — you could do more harm than good. How?

As hard as it is to admit, some people just aren’t good at handling their finances. They constantly live paycheck-to-paycheck and don’t seem interested in (or able to) change their habits. If you lend them money, you’re jeopardizing your relationship, and you might also wind up enabling their bad spending and non-savings habits.

Thoughts on Lending Money to Family or Friends

  1. Do not co-sign for a loan! If you do, you’ll be legally responsible for paying off the debt if they do not or cannot pay. How would you feel if you got stuck with your someone else’s debt? This sort of thing can cause tension and resentment, and might even destroy the relationship.
  2. If you don’t have money to lose, then don’t loan them money! We all have responsibilities of our own, so don’t loan out money that you can’t afford to lose. Make sure you have ample emergency fund in case your family has an emergency of its own.
  3. Think about giving a small financial gift. If you have the means to give some money, but feel uncomfortable with a loan, then try simply giving a smaller amount. You’ll feel good about having provided some assistance, and you won’t stress about getting your money back.
  4. Consider giving something other than money to help. If times are a bit rough, grab some groceries. If you’re afraid of enabling them, offer to help organize a yard sale or something.
  5. Offer to help them with budgeting. This can be a tricky one, as most people aren’t willing to share their finances. Even so, you can show them how you budget, and maybe share some helpful tips.
  6. If you end up making a loan, put everything in writing. Decide ahead of time when and how the loan will be paid back (e.g., lump sum or monthly payments), and have both parties sign the agreement. Make a copy and keep the original.

What if You Can’t (or Won’t) Lend Them Money?

If you end up having to say ‘no’ to a friend or a family member, keep it brief. Explain to them you just can’t loan them the money, but you can offer your support (or a small gift if you can). Just remember, it’s up to you to weigh the options and come up with the right answer for you.

Published on March 25th, 2009
Modified on October 4th, 2011 - 32 Comments
Filed under: Miscellany

About the author: helps families achieve financial freedom by sharing tips for reducing debt and building freelance income over at Couple Money.

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32 Responses to “Lending Money to Family and Friends”

  1. 1
    DDFD at DivorcedDadFrugalDad Says:

    I have always felt that you should help out if you can, but don’t expect to get the money back– it is more of a gift.

  2. 2
    tom Says:

    I wrote a similar article stating that lending money to friends and relatives is a bad idea.

    I mean if they can’t help themselves right now, how will they be able to pay you back when they are deeper in debt?

    Also, offering non financial help is best but really most people just like to throw money at the problem.

  3. 3
    My Journey Says:

    While I agree about the general sentiment of the article, IF you are going to do it…why not do it through a lending club or prosper sort of situation?

    Additionally it should be noted that the IRS doesn’t allow for interest free family loans – you have to charge at least the AFR rate, or the imputed interest (that you didn’t charge) is a taxable gift.

  4. 4
    Baker @ ManVsDebt Says:

    Kudos for tackling a subject some pf bloggers might ignore. Lending money to family and friends is often a very personal experience and can cause some debate.

    Personally, I go by the rule that we don’t ever loan money to anyone. If we ever give money to family or friends we let them know up front it is a gift. They should not concentrate on paying it back. There is no time frame and no expectation.

    The truth is it is very hard to realistically get to that point emotionally. In a few rare cases, my wife and I have given money, because we were able to fully commit to giving a gift and not a loan.

    This principle has also kept me from loaning money several times that we normally would have. By now a lot of my family and friends know this principle and would only come to us in true emergency situations.

    Unless there is a true emergency, it is usually better for the personal to struggle through the situation anyhow. It will help build character and determination to turn around their financial life.

  5. 5
    Katie Says:

    I’d like to add another caution about helping out friends/family. About six months ago, we learned my mother-in-law was behind on her car payments. She had just secured employment (finally!) and so we decided to lend/gift her the two payments she was behind, ensuring that her car would not be repossessed and she would be able to continue going to her job.

    We were slightly concerned she may not use the money as directed, but my husband–just having finished a business law class–informed me that if we were to write a check directly to the creditor to pay her debts that would make us liable, in a court of law, for the debt should she default on the loan. Our signature and check directed toward that loan would indicate we were able and willing to be responsible for the entire debt, should it come down to it.

    We made the check out to her.

  6. 6
    SandwichArtist Says:

    I don’t think it is true that you could be held liable if you wrote the check directly to the creditor. Our church helps out with things like that all the time and writes checks directly to creditors.

  7. 7
    Kate Says:

    I agree with DDFD. If you’re going to loan money to a family member or friend, you should only do so if you are completely comfortable with the prospect of NEVER getting your money back. Even if you can’t afford to give a lot, sometimes the simple gesture of loaning (or really, giving) a few dollars to a friend or family member in need can do wonders. It’s a great example of what the authors a book I read a few years ago called The Power of Nice, are calling “The Power of Small”– that our tiniest actions can have a huge impact– and I think that’s the case here.

  8. 8
    My Journey Says:

    @katie,

    I think that may be another case of business law being taught by a non-lawyer…because I never learned that little tidbit in law school.

    Regardless your actions allows you to sleep at night and that is the most important thing.

  9. 9
    Danielle Says:

    I never have been in a position to loan a large sum of money to a family member, but I am sure it will come up later in my life.

    I agree with those above who say you have to think of any “loan” as a gift, not expecting to get it back.

    I heard just recently about a bank that is actually set up to facilitate person to person loans like this. Don’t have any experience with it though.

    Virgin Money Personal Loans.

  10. 10
    Laura Says:

    Thanks for the feedback everyone! I think lending money to family and friends can lead to a lot of resentment easily.

    I have been on both sides, so this post was also based on personal experience. I know that I felt bad getting a loan with my mom as a co-signer. It has been completely paid off by me and I was never late, but I still felt bad having my mom on the loan. I had seen my mom burned by a few for her generosity and I want to not have that disappointment.

    I have gifted small amounts for true emergencies and personally find it better than a loan. I think you know what’s right for you and at the same time protect yourself.

    @Katie: I haven’t heard of this law, but it does pay to check out for yourself the rules in your state.

  11. 11
    bob thacher Says:

    Can you tell me what the imputed interest rate is today,please.

    I’m going to carry back a real estate trust deed and want charge the minimum amount I can charge without running afoul of the current umputed interest rate.

    Thanks,

    Bob Thacher
    760/365-1100

  12. 12
    Natalie Says:

    Go to the IRS website. In the search box on the top right type in AFR. This stands for Applicable Federal Rates. Then click on the first one. You would next choose the one for the month the loan is/was made. Ex Apr 2009.
    Then choose the period that goes with the loan term. Short-term, mid-term or long-term.
    There is no imputed interest calculation for loans totaling $10,000 or less if the loan is not directly attributable to purchase of income producing assets.
    Gift loans between individualss where the total outstanding in $100k or less no imputed interest will be charged if the borrower’s annual net investment income is less than $1k.

  13. 13
    Trevor @ Financial Nut Says:

    I’m going to do my best to stay away from having to lend money to people that are close to me. That just causes all sorts of problems!

    Have charity. Make sure you do it if you can. But be careful because something like this can seriously damage relationships long-term. And if you can’t do it, don’t! Just don’t! Don’t put yourself in poor position if you really can’t help.

  14. 14
    dePriest Says:

    If you do lend money to a friend or relative and they ask for another loan before they’ve repaid the first, don’t do it. My eldest son owes my husband and me approximately $20,000 because of job loss years ago. He’s only paid about $2000 of his original debt. This is $20,000 we could have used toward our retirement. We no longer give him cash for anything.

  15. 15
    Ken Says:

    I just made a loan to my brother..already regretting it. But if he doesn’t follow through on it all, it will be a Christmas gift.

  16. 16
    Greg Says:

    Never cosign, front the money yourself.

    Never loan what you can not walk away from.

    Put everything in writing. This is not for a lawsuit, but so everyone is clear on the terms.

    If the issue is financial distress, discuss how to avoid it again.

    Take a honest hard look and determine if your actions are helping or enabling.

  17. 17
    David Says:

    Has anyone here ever tried Virgin Money? I never have, but it seems like it may help out in a situation where you loan money to family and friends. I’m very curious if anyone has had a good/bad experience with them.

  18. 18
    James Says:

    I have never co-signed a loan for a friend….but my parents co-signed for my first car loan. Of course, I was 17 at the time….but it took a lot of convincing. In all, I will have to say that I have never had good experiences with lending friends money…for some reason it never comes back. So in addition to having to constantly nag your friends….your friendship takes a beating.

  19. 19
    Lynn Says:

    My husband’s 23 year old neice was trying to buy a $500,000 house. Since she did not have a job and can barely support herself, she asked her mom (my husband’s sister) for the entire $500,000. Her mom, who spoiled her all her life, agreeed to give her $400,000, but asked us to chip in $100,000. I told her we do not have that much money. My husband’s sister said “don’t lie, I know you have the money.” She then did a detailed financial analysis with us (how many years we worked, how much we make each year and how much we spend each year). Based on her calculation, she believed that we had at least $300,000 in bank. I did not dispute and just I cannot loan(give) her daughter $100,000 as we still have 3 young children and we need to save for their college fund and our own retirement. Instead, we wrote her a $1,000 check (which she cashed) and said it was a gift. The relationship went sour. Both my husband’s sister and niece resent us and never call us again. Even my husband’s mom is upset that we did not loan some money to his niece. It is really hard to handle thse types of situation and I don’t know how we could have handled it better.

  20. 20
    lynn Says:

    This is Lynn again. A couple of weeks after I turned down my husband’s niece and sister’s request to borrow $100,000 to buy a house, today a really close coworker of mine asked me to borrow $150,000 for buying a house. She said the house requires all cash offer and I am the only source that she can think of that has that much money. I immediately said no I don’t have that much money and I can tell she is upset. Am I out of my mind or these people are? My brother recently also asked for $10,000 from me for starting a new business, which I gave to him. I never expect to see that money again. Why people keeps asking me for money. My money did not fly down from the sky, I worked hard and saved every penny of it.

  21. 21
    dePriest Says:

    “…I worked hard and saved…” Lynn, that’s why you shouldn’t feel guilty about not loaning any money to anyone, ever. Even if it’s a dire emergency, you still need to be careful – if you can’t afford to lose it, don’t loan it. You have every right to use your money as you see fit. Sure, some people have a harder time than others in this life, but those people have no right to expect you to give your hard-earned money to them! As I wrote earlier, my husband and I have loaned (I use the term loosely) our son $20,000 or more and have received $2000 of it back, if that. Our son is, of course, much younger than we and has his whole working life to make that money. My husband and I could have used that money for our retirement. Instead, my husband, who is not in the best of health, has to work a part-time job just so we can have enough money for him to retire. I would work except for extreme physical limitations. Your children’s education and your and your husband’s retirement and other needs come before anyone else’s.

  22. 22
    caroline humber Says:

    i’m the kind of person i will alway give if i have it this year has been bad for me i have no money and my health has in very bad and still is i would like to give my kids everythink and have a good life im not good at writhing things down but i would be able to talk to anyone that would help me and my family i will like to

  23. 23
    caroline humber Says:

    i have now friends i’ve tried three time to kill myself this year i need help phone me on 07797838155 please

  24. 24
    JESS Says:

    I have an existing problem with my husband and I don’t know what to do. Everything I’ve read on this page I’ve done…still he doesn’t get it. His sister borrows money often, $200.00 – $500.00 biweekly and always pays back, not in the same manner but does. She has been married 17 yrs till this day has not made any kind of investments, such as a home. She recently moved in with her mother with her husband and two children. I don’t know what else to do to stop the habit. PLEASE HELP!! My husband’s answer is “she is my sister I will always help my family, deal with it”.

    Am I wrong?? I am not rich, we live with little savings in the bank that easily can be gone in an emergency.

    I

  25. 25
    Mommy of 3 Says:

    I have a question….my husband’s father got a large sum of money in 2003, he decided to buy my husband a $2000 truck as we were a young couple just starting out and my husband needed the truck for work. He also paid off my Explorer for $5000. I personally signed an agreement with his father to pay him back the money for the Explorer but the truck. My husbands father made some other bad investments with his money and lost it all. Now he wants the money for the truck and the car and some other maintenence right now. He is trying to sue us even though we have made payments to him every so often, not as regular as we should, but we are trying. We should have the $5000 already almost paid off but he is tacking on the other stuff.

    Is this legal for one…and for two is there a statute of limitations or something like that on how many years have to go by before it gets washed away….like 7 years on your credit type thing? Thanks!

  26. 26
    A consern friend Says:

    A year ago a friend of mine loan out some money to a friend of hers,and that lady had the neverd to file a Temporary Restraning Order against her. I went to court with her and when the Jugde ask my friend if she understood the Order and my friend told the Jugde Yes” But I have a question How will I be able to collect my money she owes me if I’m goin to have a restrainig order from her? Well that lady for got to mantion that she owed money to my friend.So know my friend has to file a small claim against her,But the problem now is that she didn’t make a Promissed Note for her friend to sign and she don’t know how or what to do so she can make her sign one if she has a restraning order? Can any one help me with any addvise so I can help her out?

  27. 27
    MissNik Says:

    People, listen up, IT’S YOUR MONEY, YOU EARNED IT. You want to feel benevolent, fine, but that altruistic notion will eventually bite you in the rear end. While I was dating my then fiance 10 years ago, I became embittered because I saw how his family abused his generous good nature. I was, at the time, a single Mom, struggling financially. I had decided that I was NOT going to ask for any sort of assistance, from anyone, not even the state. I had a crappy little hourly job, that had the potential to eventually go full time with benefits and salary. I was not receiving child support, nor alimony. Here I was, just passed 20, and I found myself alone in the world with NO job skills to speak of, and responsible for not only myself but two kids. I told myself that NOW was the time for me to learn how to survive on my own, and I did not want to be reliant on any man or anyone else, ever again. Here I was, working my butt off literally, making all kinds of sacrifices, living on PB&J, and my fiance’s sisters were regularly asking him for $$, even though they had decent jobs, and NO kids to care for. Problem was, they’d gamble their income away at the boat, and then turn around and EXPECT him to pay their car payment, or their electric bill, etc. Even his biological Mom, who ABANDONED him as a newborn asked for cash regularly, and that was the only time we’d see or hear from her! I kept giving little hints to him… “Wow, well if I can do this on my own, there really is no excuse for anyone else”…. or “If you keep giving your money away to them, they will never learn how to manage their own”. He finally took notice, but it wasn’t until we were married that the gravy train came to an end. What truly disgusted me was, the fact that he works SO HARD. We are in construction, he owns his own company, and the man has earned his dough through blood, sweat, and tears. He is gone before the sun comes up, and gets home tired, beleaguered and dirty after the sun comes down. Even though he made decent money, it wasn’t enough to be handing out willy nilly, we/he is not a millionaire! But, they seemed to think he had bank. Lots of it. Funny how people think that. They have no idea how much we pay for our equipment loans (in excess of 30K PER MONTH), or how much our materials run us (over 60K PER MONTH). Once OUR bills are paid, there is very little left over, and certainly not enough to invest in a 401K or college fund. But here they came, constantly with their hands out. Who was he doing all this work for? For THEM? NO! It was for himself in the beginning, then after we got married, for OUR family. I was getting tired watching them buy things for themselves that I could not buy for myself, with OUR money! I finally put my foot down, but luckily I didn’t have to stomp too hard! Hubby had already begun to see all on his own that these women were perfectly capable of providing for themselves, and only needed to borrow money because they’d blown theirs gambling or shopping. He decided he was NOT responsible for their gambling or shopping habits, and he’s not. We are all responsible for ourselves! Or should be anyway! If they were truly in need, and usually managed their cash well, I *might* consider it, but I doubt it. Not to sound cold, or heartless, but once you’ve spent time volunteering regularly in a homeless shelter, or an abused women’s shelter, you learn WHO is TRULY in “need”, and who is most definitely NOT. Oh yes, the family blamed ME, naturally, and I really did not care. These women were NOT “in true need”, but wanted supplemental income so they could party, gamble, and shop. Not fair to him, me or our kids. I also disagree with making any sum a “gift”, unless it’s a birthday. Gifting money away, or loaning it- SEMANTICS. Someone is still getting something for nothing, and they have no intention of giving a “loan” back either. I WILL take them to the store, buy diapers, formula, things for their kids that they now have, and I also will give them a job, helping me with the books, house cleaning, whatever, but absolutely NO freebies. I sat down with 2 of my nieces and taught them how to budget. They haven’t asked for a dime since. Gifting doesn’t teach people how to manage their income, it just teaches them to look to others instead of finding the power to succeed in themselves. Not healthy. You can call me a miser if you want, but I consider asking people, family or not, for money to be in extremely bad taste. Some of the stories on here…. WOW!! The fact that someone expects you to give 100K so someone can buy a house, OMG, that’s totally INSANE. The entitlement people feel, it’s disgusting! Fact is, I WISH we made the kind of money that we could just go handing out willy nilly. But we don’t. And even if we did, how is that truly helping the recipient? It’s not. Keep your money in your pocket people and let the freeloaders know that YOU ARE NOT A BANK! Trust me, if I could manage to support myself and two kids, with no formal education or even job skills, then the rest of your freeloaders have no excuse. End the entitlement and stop the abuse! No “gifts”. No loans. But DO offer solid financial advice. Do help them look for a job, or second job. Do tell them my story, in essence, if that helps. Besides, you, me… we won’t always be around to bail people out, so the sooner they learn to manage their money, the better. Sometimes it’s just bad luck, sometimes it IS laziness, and sometimes it’s just bad budgeting. Whatever the case YOU are NOT responsible for THEM! Do NOT let it or them make you feel guilty or that you don’t care. This IS after all, YOUR life, YOUR income, and you are absolutely NOT obligated by blood or anything else to help support people who are perfectly capable of supporting themselves. Just my 2 cents worth :)

  28. 28
    jon Says:

    some times if you tell the IRS that the person who got that money and one year passes and no pay back that sure becomes income ! it’s a good way to get back your money! it can work!

  29. 29
    J_Daniels Says:

    Borrowing from friends and family may not be a good idea – but it’s got it’s set of positive points as well. One; they are flexible – I’m not saying you can play around with the terms after it’s been agreed upon – just that you can structure the loan around your situation in a way that is comfortable for both yourself and your lender/borrower, plus there is a lesser chance of the loan being defaulted this way. Two; you can , most times, go for a better/lesser interest rate. Three; even though your credit worthiness does play an important part, you can expect a family member to overlook a slightly singed credit history, more-so than a bank. Four; there are no middlemen to complicate the process, there are plenty of online services (such as http://www.loanback.com) offering legal loan agreements and promissory notes for loan formalization. The key is to plan it/think it through before jumping in.

  30. 30
    phil Says:

    Yes, I gave money to a family member several times but the inevitable time came when they did something extremely irresponsible and I said I’d have to think about it. Well, he forced me to answer quickly so the answer was no. Now my sibling hates me because I’d refused to give a loan.
    Moral of the story: Tell your family you won’t ever give them anything. If they hit hard times then decide if they need help based on the need AND their responsibility. Don’t give anyone help for irresponsible behavior unless they’ll die or be seriously injured if you withhold. Make all aid gifts and NEVER loans.
    Also:
    1. Expect to get nothing in return.
    2. If you give to an irresponsible family member then, for your effort, you can expect to be disowned and scorned by them. People like this don’t admire generosity and kindness – they view this as weakness, not the strength it actually represents. Sadly, they admire only an iron fist and this is what the universe will give them.
    3. Give only when and because it’s the right thing to do.
    Cheers

  31. 31
    Michael Says:

    Any decision intended to elicit behavioral change that does not include involving the person or people affected by that decision is manipulation. It’s how we train animals, not treat adult human beings.

    Furthermore, if you love someone and you see that they could use your help, making them ask for it is degrading. If you do not like their choices, you are free to say so and kindly request that they consider alternatives in the future. In the end, when a family member refuses to help another family member it raises obvious questions: How do you define family and do you value family in your life?

    Finally, in the U.S. we tend to think that independence is the highest achievement. Actually, interdependence is higher and why some families pool their resources to create family businesses that raise everyone’s income far more than any single individual could have with limited capital.

  32. 32
    tesha Says:

    Hello I have a question I loaned my husbands aunt 2000 so she wouldn’t get evicted out of her place it was verbal agreement because I didn’t think she would turn on me we use to talk all day Everest always toghter.its been almost two years so I am having to sue her so now she is saying it was a gift now I have three kids two with heart problems one has had open heart surgery 5 time was paying for a truck at that time .she has no kids at all but in the letter she wrote to the court she said we was getting a long find true but I am the wife of her nephew and we family so it was a gift and she said that I got mad at a situation that we had no control over I don’t knw what situation first off all.I didn’t get a note about the loan but I have my bankstatement the paper from landlord where rent eas paid money order in my name not hers but she say its a gift.so my question is in court she has to prove it was a gift I never gave her no more that 60 at the most because she would take my kids my husband to work if I couldn’t get off that’s the most I ever gave her it was for gas for a week.

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