Lending money to friends and family often seems like a great way to help out someone you care about. But mixing finances and relationships can get messy. Here’s how to avoid the pitfalls of making personal loans to people close to you.
Why It’s Risky to Lend to Friends and Family
The biggest risk of lending money to friends or family is not getting paid back. A survey by CreditCards.com found that nearly 3 in 4 people (73%) who lent money to a friend or family member were never paid back in full.
When money comes between loved ones, it can irreparably damage relationships. People who were once close can end up resenting or even hating each other over unpaid debts.
Lending Money Can Enable Bad Behavior
Enabling a friend’s or relative’s irresponsible financial behavior by lending them money doesn’t really help them in the long run. It removes the natural consequences of overspending and poor money management that could motivate them to reform their habits.
For example, if you lend money to a sibling who is continually struggling with credit card debt, it allows them to avoid the tough but necessary step of cutting up their cards and living on a strict budget. Your loan just lets them dig a deeper hole.
It Puts You in an Uncomfortable Position
Having to constantly ask or remind someone to repay you makes the lender feel like a debt collector. The borrower probably feels resentful or embarrassed as well. This awkward dynamic strains the relationship even if the loan is eventually repaid.
“Trust is the glue of life. It’s the most essential ingredient in effective communication. It’s the foundational principle that holds all relationships.”
– Stephen R. Covey
You may avoid bringing up the debt rather than hassle a loved one for money. But then you’re left frustrated that they seem to have forgotten their obligation. No one enjoys feeling like a nag or being perceived as greedy.
You Lose More Than Just Money
Not getting paid back is frustrating enough. But losing a meaningful friendship or damaging a family relationship over money can be heartbreaking. The financial loss stings less than the loss of rapport and trust.
“In the end, there doesn’t have to be anyone who understands you. There just has to be someone who wants to.”
– Robert Brault
For example, lending money to a cousin for a business venture that fails could mean you lose your $5,000 investment. But it also could mean not getting invited to family events anymore to avoid tension. The tangible monetary loss is easier to recover from than the family alienation.
How to Handle Requests for Loans
When a friend or family member asks to borrow money, proceed with extreme caution. Consider these guidelines:
- Don’t lend more than you can afford to lose. If you can’t live without that money, don’t risk it. Only lend an amount you could write off completely if you had to.
- Treat it like a business transaction. Draw up a formal promissory note with terms, deadlines, interest, and repayment schedule. Make the person sign it.
- Say no if you have doubts. Don’t feel pressured into lending money you’re genuinely uncomfortable risking. It’s better to politely decline than resent someone later.
- Offer to help in other ways if possible. You could pay a bill directly instead of handing over cash, for instance. That guarantees the money goes toward necessities.
- Refer the person to other resources. Suggest credit counseling services, debt consolidation programs, or short-term assistance if applicable. There are alternatives to personal loans.
Alternatives to Putting Your Finances at Risk
If saying no to a request for money seems too harsh, there are other ways to help that don’t put your finances or relationships in jeopardy:
“The best way to find yourself is to lose yourself in the service of others.”
– Mahatma Gandhi
- Give a gift with no strings attached, not a loan. Make it clear you expect nothing in return so it doesn’t morph into a debt.
- Pay a bill or expense directly for the person rather than giving cash. You know exactly where your money is going.
- Help the person budget, reduce expenses, or find additional income sources. Provide guidance and accountability but not direct financing.
- Direct the person to social service programs, charities, or short-term aid that could meet their need. Sometimes all people need is direction on where to turn.
- Offer business, career, or financial guidance instead of money. Share your expertise rather than your cash.
The bottom line is to protect your financial health and relationships. While lending money seems noble in theory, it often ends badly in reality. With wisdom and creativity, you can find other impactful ways to help friends and family.
“The closest thing to being cared for is to care for someone else.”
– Carson McCullers
Disclaimer: This blog post is intended for informational purposes only and does not constitute financial advice. Always consult with a qualified financial advisor before making any significant financial decisions.
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