Should You Lend Money To Friends and Relatives?
Should You Lend Money To Friends and Relatives?
Your cousin asks to borrow a couple of hundred dollars. Something unexpected came up, and they just need a little help making it to the next payday. They promise they’ll return the money; no problem you think…
This scenario plays out between friends and relatives all the time. According to the Federal Reserve Board Survey of Consumer Finances, each year approximately $89 billion passes through the hands of friends and family by way of lending and borrowing. Undoubtedly you have been on at least one side of a lending/borrowing transaction. Perhaps you’ve been on both sides.
As you are trying to get a handle on your finances, you may be faced with the dilemma of whether or not to lend money. So the question is, is it okay? Should you lend money to friends and relatives?
Let’s take a look at what you may encounter if you lend money and how to handle it if you’re asked.
The Dangers of Lending Money to Friends and Relatives
Sometimes money and friends don’t mix — at least not in the context of lending and borrowing. Here’s what can happen when money passes through the hands of friends.
Strain on the Relationship
Remember the cousin who swore they would pay you back in a couple of weeks? Well, they didn’t. It’s been several weeks now, and still nothing. But you did just see on Facebook that she went to a concert a few days ago. Wait a minute…what about your money? You give her a call, and surprisingly, she doesn’t answer. A few more weeks go by, and it’s clear she’s avoiding you.
Borrowing money changes the dynamic of personal relationships. Now your cousin isn’t just your cousin anymore. She is your debtor, and you are her creditor.
She may feel guilty about skipping out on the loan, (not guilty enough to pay it though) and deals with the guilt by avoiding you. You now have a wedge between you — an unnecessary one — that wasn’t there before. This is not what you had in mind when you agreed to help her out.
Simple loans between friends and family are anything but. Lend money to someone, and you are suddenly aware of what they are choosing to do with their money until they pay you back. Your relationship changes.
Expectation and Enabling
The simple act of saying yes to a request to borrow can potentially set an expectation that you will be available to lend a second time, and of course a third and fourth time.
Most people looking to borrow from a friend or relative don’t think they’ll need to borrow again, but if they do, guess who they are likely to come back to? Yup, you! You did it before, so why not?
Lend multiple times to the same person, and the expectation eventually turns into entitlement. The borrower expects and assumes that the answer will always be yes.
This puts you in an awkward position should you not be able to lend the money easily. It’s hard to say no, and you may feel pressured to find a way to say yes. I have seen people compromise their own financial stability to help a friend or relative.
Furthermore, your desire to be a help may end up hurting your friend or relative. If they repeatedly borrow money instead of addressing the root of their financial issues, your generosity will provide them with a safety net, and they will have no incentive to try to help themselves.
You May Never Get Your Money Back
The biggest and most obvious danger of lending money is that you may never get it back. Statistics on how many loans between friends and relatives are paid back aren’t available, but I’ll do an informal survey right now.
Have you ever borrowed money but didn’t pay it back? Yes? Me too. Survey complete.
Chances are extremely high that if you lend money, you may never be repaid — ever. As time passes, the need to repay a loan becomes less urgent for the borrower until eventually…they “forget.” There simply isn’t pressure to make good on the loan as there would be if they borrowed from a bank. Yes, they may feel awkward initially, but after a while, that feeling dissipates, and they will be less compelled to repay you.
This could put you in an uncomfortable position if you were depending on receiving the money back. And because you’re the one who lent the money, you will never forget.
What You Can Do Instead of Lending Money
So, there are several pitfalls in lending money to others. Of course, the positive of lending money is that you are (potentially) helping someone out and meeting a need — which is something we should all do if we can. That being said, there other ways to help out that won’t put your relationships or finances at risk. Here is a look at what you can do.
Gift the Money
You could simply give the money. If you have it free and clear — without having to juggle your finances — and you want to, simply provide the money as a gift with no obligation for the recipient to return it.
You can state something along the lines of, “I do not lend money, but I am happy to give X amount to you.” Make it 100% clear that it is a gift.
Gifting the money ends the transaction at that point and preemptively reduces any chances of “default” or possible strain on the relationship.
Offer a Way to Earn the Money
If you do want to help, but you don’t want to give the money outright, then provide the money in exchange for work. Your friend or relative could do some work around your home, help with the kids or personal errands, or accomplish some tasks with your job or small business, if applicable.
Instead of them repaying you, they are working for the money. This deepens the understanding of the request on the part of the borrower.
Help Address the Need to Borrow
Depending on the circumstances that led your friend or relative to ask you for money, you may be of greater assistance by helping them identify a solution to the source of their need.
If it appears that the cause behind the loan request is overspending and mismanagement of their finances, you could offer to help them establish a budget or to be their accountability partner. This offer is not quite as sexy as plunking down the money they asked for, but the results are longer lasting. Your friend may or may not recognize that, so don’t be surprised if they decline.
But be sincere in your request; if they don’t accept it immediately, they may return for your help later.
If you are not interested in providing an alternative solution to a loan or are unable to give the money as a gift, then you need to muster up the courage to say no.
Saying no to a request to borrow money is not easy. Your friend may not understand that a loan could potentially change your relationship — they just want the money. So it is up to you to be 100% firm in your decision. If you waver, you can easily be convinced to lend the money against your better judgment.
Make sure the words you use leave no room for misinterpretation. Again, stating that you do not lend money (and don’t have it to give) will get the message across and prevent future requests.
Your “no” may come as a surprise, especially if you’ve said yes in the past, but as long as you’re comfortable, that is what matters. Your friend or relative will have no other choice but to accept your answer.
If You Choose to Lend
After considering the pitfalls, should you still decide to lend, proceed with caution and keep the following tips in mind.
Evaluate Your Ability To Lend
It’s easy to misjudge whether you’re in a position to help. Your friend or relative may assume you are, but no one knows the details of what’s going on behind your financial doors better than you do.
As a result, you have to be brutally honest with yourself. Ask yourself if you have the money free and clear. Will you be okay if you do not receive it back? Do you have to juggle things to make this loan happen? If so, you are not in a position to say yes. You need to be open with your friend or relative about that.
Do Not Expect the Money Back
As mentioned earlier, there is a high chance you will not see your money again, so go into the transaction assuming you won’t and mentally treat the loan as a gift. That way you’ll be pleasantly surprised if the money is returned. Be sure not to “lend” more than you can afford to lose.
If someone is requesting money from you, you have every right to ask questions about the nature of their request. If they have not already indicated why they are borrowing, ask. You want to make sure it is a legitimate request, and they are not just making their overspending your problem.
Get it in Writing
Hold your borrower accountable to what they are asking by documenting the loan in writing, having them sign it, and providing them with a copy. Include the amount borrowed, the due date, conditions of the loan, and what will happen if the loan is paid late or goes unpaid.
Develop a Policy
Establish guidelines so that you can always be firm when you respond to a request to borrow. For example, you could decide that you do not lend over $500, or that you will not make repeat loans to the same person.
Perhaps you want to consider the motives behind the loan. If the borrower is making their overspending your emergency, that could be a reason to decline.
Developing your own lending policy before you’re asked for a penny will prevent you from getting caught off-guard and making decisions on the spot that you’ll later regret.
Balance Your Priorities
Now that you know the drawbacks of lending money to friends and relatives as well as some alternative options, you can objectively and carefully weigh any future requests to borrow money.
Be sure to strike a balance between prioritizing your generosity, keeping your relationship intact, recognizing a genuine need, and of course making sure you’re not compromising your own finances.
Should you decide not to lend money, know that your decision does not mean you’re cheap or cold or unwilling to help. It means you are cautious about going down a path that can potentially alter the dynamic of your relationships or one that puts you in a negative financial situation. Be firm and confident in your choice and your friends and relatives will catch on!