The Right Way to Loan Money to Family and Friends

When a friend or a family members asks to borrow money, your first inclination is probably to help out. You can save yourself a lot of grief by knowing in advance how you'll handle these situations.

  • Share
  • Read Later
Images Source / Getty Images

“Neither a borrower nor a lender be,” Shakespeare wrote in Hamlet. “For oft loan loses both itself and friend.”

When a friend or a family members asks to borrow money, your first inclination is probably to help out. But many people have learned the hard way that friendships and finances make a poor mix. You can save yourself a lot of grief by knowing in advance how you’ll handle these situations.

(LIST: 12 Things You Should Stop Buying Now)

Some people decide they’ll never make personal loans. If they’re asked, they say something like, “Sorry, but it’s my policy never to lend money to people I know.” If you think this is too harsh, you can offer to help in some other way.

Not all loans between family and friends end in disaster, of course. In fact, although I’ve never been able to find stats on the subject, I’d be willing to wager that most loans go smoothly. But the potential for trouble is so great that you should think twice before lending (or borrowing) money. How would it affect your finances — and your friendship?

You’re likely better off saying “no” than putting yourself in a position where you have to hound a friend for money. I’ve watched my own family be put under strain from this sort of situation. One of my brothers borrowed a large chunk of change from my mother, money she could barely afford to part with. He’s never repaid the loan (despite buying brand new iPhones for his wife and kids), and now nobody in the family will trust him financially. It’s awkward.

Despite these warnings, some of you will be tempted to lend money. If you do, at least be smart about it:

  • Discuss other options. Is there some other way you could help your friend? Sometimes money may seem like the only answer when there are actually other ways to deal with a problem.
  • Only lend money you can afford to lose. You may never see the money again, so don’t put your own financial well-being on the line just because you feel sorry for your cousin (or your son). Make sure you take care of yourself before you lend money.
  • Be clear about your expectations. Draw up a payment schedule. Discuss what happens if something goes wrong.
  • Get it in writing. Don’t just hand over the money without some sort of record. At sites like LawDepot.com, you can fill out a form online, and for a few bucks, you’ll get a completed promissory note. There’s also a free sample template at expertlaw.com.
  • Deal with problems immediately. You may feel like a nice guy by not reminding the borrower that she’s 30 days past due, but you’re just setting yourself up for trouble. Keep the lines of communication open.

Finally, think very carefully before co-signing on a loan. As a co-signer, you’re legally obligated for the debt. If something goes wrong, you’ll be stuck with the payments, a black mark on your credit report, and a broken friendship. If you want to help, it’s probably better to lend money than to co-sign.

(MORE: How to Know if You’re on Track for Retirement)

If you can afford it (and it doesn’t feel strange), consider giving the money instead. That way there’s no ickiness on either side. If your friend pays you back, great; if not, you can feel good about helping her out. And remember: It’s always okay to politely refuse.

0 comments