Blog

Blog Feed

19

Never Lend Money to Your Family and Friends!

by Elle on April 15, 2010

I’ve been getting phone calls from different parts of my family about helping out others with money. They all seemed stressed out because they’re not sure if it’s a good idea or not. I feel bad for them because I’ve been through this before. Many of us have friends or family that ask us for help financially. Sometimes it’s the same person that comes to us with one emergency or another.

This weekend I was upset because a sibling who has a history of money mismanagement has gotten another bail out and my relative called me about it. They feel bad either way: if they give, they lose money, if they refuse they feel cold-hearted. She felt like she was in a lose-lose situation.

We talked it through, but I honestly think she’ll keep bailing family out. She has a generous heart and I hope she learns that helping family doesn’t always mean loaning money. I want to share a few thoughts on the topic; hopefully it can benefit others.

 

Lending money to loved ones can break your heart.

Lending money to loved ones can break your heart.

 

Ask Before Lending Money to Family and Friends

Since this is such a delicate situation that can easily go bad, you really owe it to yourself to ask a few questions before deciding what to do.

  • Are you their emergency fund? Have you noticed that they constantly go to you to get financial help? If so, then you’re their emergency fund. You should really examine if they’re having emergencies or if they have bad money management.
  • Do you have an emergency fund? If you can’t take care of yourself, then bailing out family and friends puts you in a very dangerous situation.
  • Can you really afford to help them? You may have some savings tucked away, but can you afford never seein that money again?

Ideas to Help Family and Friends Instead of Lending

If you want to help, but think that bailing them out with money is going to make it worse, then here are some things I’ve done.

  • Give a gift. Don’t loan, just give a little something. We’ve given amounts that haven’t damaged our budget with no expectation of getting it back. It’s a free and clear gift.
  • Be specific with your gift. Perhaps just giving money will only mask the problem, so you may want to give a gift card for their specific need.
  • Offer to help them with budgeting. You don’t have to look at their numbers, perhaps you can share your budget spreadsheet.
  • Just say no. It can be hard to do, but sometimes it’s the best way to wake them up to their financial problem.

Most of the time,with the exception of option #4, the recipient takes it well. Family tends to complain more when you just say no, but no one has ever stopped talking to me.

How to Loan Money to Family and Friends

I know some people will still loan money to their family for various reasons. Since it’s a personal choice, I wanted to include a few tips. At the very least, I’m asking you to reduce the strain of the situation and have some formality to it.

Whatever you do, have it in writing!

Avoid any confusion or miscommunication by stating the loan amount, the due date, and the payment plan. yes, a payment plan. You’e more likely to see your money again if you treat this professionally. If they object to this simple request, then you may not want to give out a loan. You’re probably giving them a better deal than any bank would and you’re willing to work out a manageable plan, so what’s their problem?
This may seem tacky for some, but if you’re loaning a decent amount of money,I think you deserve to  how they’re using the money. Again, this is standard when receiving a bank loan. having this information can help you determine if this is something worthwhile.

It’s ultimately your decision, but please, please consider it carefully before you hand out any cash.

Encourage Your Family and Friends To Save

Instead of feeling guilty because you’re debating whether to bail them out or not, turn the tables. If your family or friends mentioned that they’re reaching for a financial goal, encourage them. For example, if they open a savings account and making regular deposits, celebrate with them.

Your Thoughts on Lending to Family and Friends

Have you lent money to loved ones? Has any of them taken advantage of your generosity? Do you have any advice on how to handle this delicate situation?

Photo Credit:CarbonNYC

Related Posts Plugin for WordPress, Blogger...

Get Free Email Updates

I take your privacy very seriously

About

If you enjoyed today's post and want to receive the latest from Couple Money, please join our free newsletter or subscribe to our RSS feed.

Tagged as: family and money, lend money

  • http://www.personalfinancebythebook.com Joe Plemon

    My wife and I simply don’t loan money to friends and family. The biggest risk, as we see it, is that the relationship will be strained or broken. Why? Because in reality the money will probably not be paid back. Going through life with a friend or relative who owes you money is just plain awkward.

    This being said, if we have the money and we think the person is making a 100% effort to dig out of the hole they are in, we will give them the money. We think this is better than lending. Some times we can give anonymously if we think there may be some embarrassment involved in receiving a gift.

  • http://pastdueradio.com Derek Sisterhen | Past Due Radio

    Hey Elle – great post, a conversation that must be addressed for sure.

    I’ve seen people get burned time and time again with lending money to friends and relatives. I’ve even helped some folks who’ve given so much (because they became the go-to person for financial help in their family) that they are now struggling themselves. I’m with Joe – if I have some money and I know they are earnestly trying to improve their situation, I’ll GIVE it to them.

    Proverbs 22:7 says borrowers are slaves to lenders. We feel that way when we owe Chase and Sallie Mae, why wouldn’t we feel that way when we owe Uncle Charlie? On the flip side, why wouldn’t Uncle Charlie feel that way about us if he owes us money?

    I’m not going to jeopardize my relationships with the burden of a financial ball and chain. I’m not interested in being anyone’s master.

  • http://www.lenpenzo.com Len Penzo

    I have a family member who loaned a close relative over $17,000 to buy a car and guess what? Ten years later that loan has never been paid back – and it never will be.

    Meanwhile, the person that took the loan has remodeled his kitchen and spent lots of other money on other things. Deplorable – not to mention completely disrespectful.

    Some people just have no conscience.

    I don’t loan any money to friends or family unless I can afford it AND I am willing to accept that I won’t get it back anyway.

    Best,

    Len
    Len Penzo dot Com

  • http://learningparenting.com Tim

    The previous comments are right on. Just make it a gift if you want to help out. You don’t want your family / friend get togethers to become a source of stress if a loan doesn’t work out.

    However, if you do take the route of lending money, then the post’s tips are correct. Have it in writing and have some knowledge of spending habits. If someone is insulted that you won’t loan without this information, they probably had no intention of paying it back.

  • http://watsoninc.blogspot.com/2010/03/whats-your-financial-mindset.html Roshawn @ Watson Inc

    I agree with all of the above comments. I also think that we sometimes worsen the situation by giving because we allow their misbehavior (poor financial management) to continue. We have to be careful what we call help.

  • Pingback: Black Coffee: My Favorite Blogs, Money News & Opinions #42 (The Boyz In the Hood Edition)

  • Elle

    Thanks for sharing your thoughts everyone. I’ve been burned by lending money to family. Part of my frustration was that I’ve had a habit of ‘loaning’ without really looking into why they need it or even coming up with a repayment plan. I know that’s my fault for not checking and I’ve learned from it. I’m more inclined now to say no.

  • Pingback: Weekend reading: Why I’ve sold a few shares as the bull marches on

  • http://frugalzeitgeist.com Forest

    I lent a large amount of cash to two close family members (withing 6months or each other) through a personal loan and off my credit cards as they were in desperate situations. I was always ok with my cash but was young and did not have the money to lend from savings.

    Anyway all was well for a few months after with the repayments and then it went to hell and 7 years later I found myself with $40k of debt that I could no longer handle.

    They are both in dire straits and I really think their mentalities will mean they always will be. I also don’t think they appreciate what situation they put me in, I was dragged into their world for being too kind and not saying NO.

    As of January this year I have the debt in a debt management plan and pay roughly $200 a month for the next 18 years (equiv of a mortgage in some places!)…. I’m slowly recovering myself and am determined to build up savings and get myself far far away from those debt ridden days.

    NEVER lend to family and friends unless you can honestly afford to lose the cash :)

  • Elle

    Sorry to hear about the debt; I worry that my relative will have a similar outcome. I really appreciate you taking the time to share your story.

  • http://hopetoprosper.com Hope to Prosper

    I’m not a big fan of lending money to friends or family. Like Tim, I prefer to give the money, rather than to have to ask for it back. But, I wanted to share a more positive story, to balance against some of the nightmare stories shared by others.

    My Mom is a smart and thoughtful person. She has a business degree, worked in a bank and then owned a bookkeeping business. When it comes to money, she is one of the wisest people I know. She isn’t interested in being anyone’s emergency fund, but she has helped us kids at critical times in our lives.

    When we bought our house, I had saved up a sizable downpayment. But, I had $4K on a credit card that was killing our rations. So, even though it hurt my pride, I went to Bank of Mom. She scratched out a check, made me sign a promissary note and gave me a payment schedule, all in one shot. When I made the last payment (on time and to the penny), Mom gave me a Congratulations card and a bottle of champagne.

    Thanks Mom. That’s how I learned to operate the Bank of Dad for my kids.

  • Pingback: Get Financially Naked Review and Contest

  • Pingback: How to Manage Loans to Friends with Microsoft Excel

  • Pingback: Managing Your Friends and Money

  • Pingback: How and Why Athletes Go Broke — Couple Money

  • Pingback: The Art of Saying No — Couple Money

  • Pingback: Lending Money to Your Family — Couple Money

  • Pingback: I Can’t Help You Budget If You Can’t Help Yourself | Yakezie.com

  • http://www.cashloans.org.uk/ Cash Loans

    I totally agree and a well written article. Lending to friends and family is difficult as you don’t want to keep asking them when they will pay back the money. I’ve lost out over £200 in the past from lending to a brother in law. The same thing applies to doing favors, try and keep friends and family as just that and business and money separately. I’ve learn’t my lesson

Previous post:

Next post: