12 Crucial Tips About Lending Money to Friends and Family
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When was the last time that you lent money to a close friend or a relative? Whether it was a quick dollar for a piece of gum or a large sum for a car, loans can make you feel either great or awful. You’ll often hear stories about people who gladly lent money to help someone that matters in their life. You’ll also hear stories about those who regret giving their cash away, whether the person paid them back or not.
The problem is simply that there’s no definitive guide to handing out loans. Sometimes, you want to but you can’t. Other times, you don’t need to but you know you should. If you need any help in lending money to friends, here are some crucial tips to remember:
Crucial tips to remember when lending money
Before you even loan money, it’s important that you remember the first rule of any transaction: you have to afford it. There is no shame in being unable to help someone if you can’t even muster the cash. Remember that if you can’t even spare the money to give them, let alone save enough to do so, you have to say no. The real issue starts when you can finally afford the asking price they have.
1. Make sure to lend only to people you trust.
First and foremost, always remember that trust is as crucial as money in any loan. You have to be certain that the person you’re helping is reliable and honest. It might sound cold, but the truth is that many of us tend to loan money to people who don’t plan on giving it back. The worst thing is that they might even ask us for more and more cash later on.
To be safe, make sure that the person you trust is someone who keeps to their word. Lending money to friends doesn’t mean giving cash to anyone you know. You might even need to look into their history to see how often they pay someone back. Once you feel confident enough to loan them the money, make sure that they stick to their promise.
2. Make sure to use amounts you can afford to lose.
There’s a big reason why many people hesitate when lending money to friends: affordability. As I stated earlier, the golden rule of any transaction is to make sure you can afford what someone is asking. If a cousin or best friend asks to borrow $2000, it’s not easy to say yes, especially if you don’t know the reason for their request. However, you might not feel this way if it’s a $5 or $10 loan. Why? Because you know that you can afford to lose $5,
Follow that same principle whenever someone asks you for money. Even if it feels steep, you can still do it if you know that you can spare the loss. Assume that you might not get paid back immediately, or at all. That way, when you say yes to lending money, you’re already prepared for the worst-case scenario.
3. Use logic, not emotions, to make a loaning decision.
Sometimes, a loan feels like a scam or a fraud. Even if you like and trust that person, you might not be thinking things clearly. That’s because a lot of people tend to hand out loans or cover for others out of care or guilt. They might feel responsible for helping, or not helping, that person at all.
As tough as it sounds, emotions will not solve your issues. Money has to be spent wisely, and that sometimes means choosing your mind over your heart. So, whenever you consider loaning money, always reflect on how it can financially affect you. If the reason is valid and you trust the person you’re helping, then you can go for it. However, if you feel that they won’t hold up their end of the bargain, be sure to address that before you make a move.
4. Expect to lose the money you lend—or at least regain it slowly.
As I mentioned before, when lending money to friends, it’s a good idea to use cash you can afford to lose. That’s because there’s always a chance that you might never get it back. Mary C. Kelly, the author of Money Smart, stated that loans don’t exist among family or friends; instead, she phrased it as gifts that people give each other, sometimes without expecting anything in return. As long as you accept that risk, whether it’s a slow repayment or none at all, you can avoid feeling disappointed or sad if they can’t pay you back.
5. Check the person’s background before you lend them money.
While you might want to put all your faith and trust in your family members, it’s not always going to work out. Though a family has a strong bond, there may be times when someone gets selfish or desperate. For example, imagine that you loan cash to your favorite cousin, only for them to rack up even more debt. Not only does that cause a lot of financial problems, but it can make you feel like a fool.
Kevin Murphy, a senior financial counselor at McGraw-Hill Federal, suggests creating a checklist for any loans or transactions with family members in the future. According to him, it’s a good way of making each loan or handout a business transaction. It can also help if you examine that person’s prior financial history. For example, you might discover their previous credit scores or their existing debts. This way, when lending money to friends or family, you can see who can be trusted and who needs to be watched over.
6. Inform your family or spouse about the loan.
Another piece of advice Murphy offers is to inform your family, especially your partner or spouse, of any loans you plan to give. By involving them, you keep all your money matters transparent and help the other party stay accountable. In addition, they could even give you advice or guidance on how much should be given at a time.
7. Consider having interest or collateral for the loan.
Hemant Beniwal, the director of a financial planning firm called Ark Primary Advisors, stated that money can cause the downfall of a relationship. Lending cash or covering for someone can only go so far before trust issues, as well as money problems, begin to pile up. He advises that people who plan on lending money to friends or family should plan out some type of interest or collateral ahead of time. Though it might sound unfair, it’s a good way of ensuring that your relative or friend gives something back. Otherwise, you might end up being asked to loan to them again and again.
8. Have it all recorded in writing.
Helping someone out with a loan for their mortgage or debt may be a personal choice. However, if you want to make sure that it’s treated properly, consider recording it in writing. Even handwritten notes can do, so long as the other party agrees to it. It might seem awkward, but it can help you out in case of any legal problems or concerns. Plus, it can also help keep your friend or family member aware of their obligation over your money. It’s not a handout, but a financial aid.
9. Keep the loan a professional matter, not a personal one.
As you can tell by the advice so far, money matters can be a touchy subject. In some cases, it can even cause a serious divide among old friends and close family members. If you want to keep your loans from affecting your relationships, be clear on treating it as a professional issue. If they can’t pay you back, approach them and discuss the issue. See if there are other ways for them to make it up to you. What’s important is that you avoid making it a personal problem. Otherwise, lending money to friends will always feel like a sensitive topic.
10. Clarify how the repayment works.
Sometimes, getting repaid can be confusing and problematic for your friends or family. They might not be able to hand out the exact cash you need. Occasionally, they might not even have the chance to give you any money back at all. Prepare ahead of time by discussing with them how repayment can happen. As mentioned before, you can suggest collateral or gifts as a way to cover the cost. However, if they promise to pay you back, make sure to hold them accountable for it.
11. Always ask why they need the money.
As awkward as it seems, you should never hand out loans to anyone, even the closest of friends and family, without knowing why. In the wrong hands or with the wrong approach, this might be seen as a handout or a gift that keeps on giving. You can’t support everyone’s loans forever, especially if it’s causing you financial problems.
So, whenever lending money to friends, always ask why. If they’re honest and they need help, there should be no issue as to what the money is for. If your friends and family get defensive, however, that might be a sign of trouble.
Always remember that your money serves a purpose, and loaning to others should not be taken lightly.
12. Know when to say no and stand by it.
Lastly, there will always be a situation or moment where you have to say no. This is true in life, and it’s especially true in making loans to others. Your family member or close friend might ask for a loan that you can’t afford or risk giving out. In moments like these, it’s important to stand by your decision. If you have to say no, be sure to explain your side. As long as they understand why, it should help smooth things over. Otherwise, if they get upset or reject your reasoning, you might need to reconsider that relationship.
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- Lake, R. (2022, October 28). Do’s and Don’ts of Lending to Friends and Family. Investopedia.
- Maiti, M. (2022, February 15). 5 Do’s and Don’ts Of Lending Money To Friends Or Family. Outlook India.
- Nanda, S. (2019, May 5). 10 Smart tips to keep in mind when lending money to friends & family. MoneyTap.
- O’Connell, B. (2022, November 9). How to Lend Money to Family and Not Regret It. Investopedia.
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