Don't Loan Money to Friends and Family Members

Here's a piece from Smart Money magazine that tells how to loan money to friends (after it mentions, several times, that it's not a good idea to loan money to friends.) I have to agree -- DO NOT loan money to friends, family members, co-workers or the like. It's simply not worth it when it goes wrong (which it often does) and even when it does go right, it often creates a "strangeness" in the relationship.

So what's my solution if someone close to you needs help? I suggest you give them the money. If you can afford it and you think it will be used correctly, why not? Otherwise, I suggest you politely refuse if someone you know well asks to borrow money.

This "giving" idea has worked well for me -- both as a giver and a givee. Three examples:

• When I was in college, my grandmother "loaned" me several thousand dollars to help pay for my schooling. We both knew that it was a gift. That said, I paid her back in full (no interest) a few years after graduation. She was thrilled to get it back and said, "I never expected to see this money again."

• My dad asked me to loan him some money to put a downpayment on his house. After talking it over with my wife, we decided to give him the money instead. He ultimately decided he didn't need it, but we made the offer and he was thankful for it.

• My wife's sister has received several financial gifts from us through the years. It's been much better to give her the money and allow her to do what she wants with it. If we had loaned it to her, we'd always be thinking of it, she'd always be thinking of it, and it would strain our relationship. Who needs that in their life?

So, what's your take on the topic of lending to friends and family members? Is it a good idea or not? How do you handle these situations?

Comments

[Dr. Michael Roberts]

Hello,

This is a great blog.

Dr. Michael Roberts
www.marketbarometer.blogspot.com

[Ciji]

I always give it as a gift, rather than a loan. If they pay me back, fine, but I don't hold to over people's heads.

I rarely borrow money either. I hate the feeling that I owe money to someone I know. Maybe if a T-Mobile rep lived next door to me, I'd remember to pay my bill on time!

[TM]

having come from a family with a few substance abuse siblings, lending or giving money is enabling and simply will result in bad things. There are so many variables in your post, that it is hard to give a black and white answer.

i'm all for supporting your family, b/c in the end that is all you will have. If you can afford it give it, but don't think as Dr. Roberts wrote above "if they pay me back, fine," because that isn't a gift, it is a loan. I've given my siblings a lot of money lately, simply because they are in precarious situations where money is really tight and my wife and I don't want them or their kids to suffer because they are trying to improve their situations (that was a run-on sentence). We're financially secure, so what good is having this extra money around if I can't help family? Truth be told, I maxed out so much of my pay (95%) in our investments and retirement accounts and gave my brother and sister money, that I opted out of a vacation to help out.

friends are completely different; however, there are two friends that I would without hesitation loan or give money. They've helped me in the past without question or pause, and they know that I will do the same.

[ThisLittlePiggy]

I don't ask to borrow money. No one has asked me to borrow money. Other than immediate family, I wouldn't do it. For family, I would give it to them. In my mind, it would be a gift. Like Ciji said, if they pay it back, good for me!! But if they don't, it was a gift.

[Duane Gran]

The foremost concern in gifting or loaning money is whether it will make any difference for the receiver. There are plenty of people who will take help only to require the same assistance from you or another person shortly afterward. A person who earns x and spends x+y is destined to go broke whether you help this time around or not. It may sound harsh, but sometimes a gift or loan is accompanied by stern requirements for the receiver to change some habits.

There is also a psychological aspect where the receiver develops a resentment toward the giver. It shouldn't be this way, but taking a gift undercuts a person's dignity and the simplest target is the gift giver. While a gift relieves many tensions it doesn't eliminate the potential for bad feelings on the part of the receiver.

That said, if a friend or family member is deserving of the help it is better to give than to loan. There are just many cases where neither should be done.

[Jeff]

I agree that this can be a difficult subject. Precious little can come between people faster than money.

The example of our parents have led my wife and me to regard any money given as a gift. On three occasions, we had friends that would not accept the money unless we made it a loan. Even in those cases, however, we considered it a gift and were willing to let it go. (In all cases, the friends made good exactly as they said they would.)

[Matt]

There's a significant confusion going on here, somewhat reflected by your examples. That is, a significant difference between what one _calls_ the transaction in which money changes hands, and what it actually _is_.

If one hands over money to friends or family, one is courting disappointment if one seriously expects to be repaid, and courting singificant strife if one actually demands repayment, regardless of whether it was called a gift or a loan. When you hand over the money, count it in your personal history as a gift, and its repayment (if/when that day comes) as a windfall.

That being said, I have nothing against calling such a transaction a loan, if one thinks that it will encourage either more responsible behavior by the recipient, or less resentment over the imbalance in financial situation between the two parties. I've seen both scenarios in my own life.

I've "loaned" money to friends and relatives many times. Sometimes I'm repaid, and sometimes not. I never do it in situations where I would actually need to be repaid on a particular schedule, nor under circumstances or for reasons in which I wouldn't feel justified making an equivalent gift. That is, when I can afford it and I believe it would genuinely help the other person to improve their situation.

That would be my advice. Not "don't lend money to family and friends", but "don't, as concerns family and friends, set different criteria for when you will 'lend' and when you will 'give', because in practice they're the same thing whether you want them to be or not".

[Katie]

Regarding the resentment that can come from the borrower, that happened to me! My parents paid for college; my roommate, on the other hand, had to work 40+ hours/week as well as go to school and she was constantly short of funds. (I had to work, prob. 15 hours/week to pay some living/schooling expenses that my parents insisted on, to teach me about money.) Anyway, my friend needed $250 one month to help pay her bills and asked for a loan. I gave it to her and never said another word to her about it. If she hadn't paid me back, I would have understood.

However, for the month or two it took her to pay it back, she avoided me and was even somewhat short/cold with me. It was hard, as she was my BEST friend! Even at 21, I understood that she was acting this way because she was embarrased/resentful that I had lent her money. I would think twice before doing this again, but it would be hard to turn down a friend in true need.

[zen]

Money is a touchy subject. I will lend to friends/family small amounts (what's lunch between friends?) but large gifts always made me uncomfortable - giving or receiving. No one has ever given me a large sum except my parents, and I've never been asked to lend a large sum - and I probably wouldn't, either, much for the same reasons Katie pointed out above. And bravo for working and paying some bills, I know a few people that rode their parents for all they could - car, bills, entertainment - and were shocked that after graduation they didn't land a job that could maintain their lifestyle.

[jeremy]

So where do i get a gift, starving,unemployed thanks to G.W.B. need to pay some bills,keep getting turned down for loans. where is a good christian person that likes to give back to people that give and give to help others. I really need financial help but it can not cost me money unless it is for paying back a real loan.

[Sara]

Jeremy, how did GWB cause you to lose your job? Let's hear specifically how that happened. And if you are starving how is it you are on the internet? If you are being turned down for loans you need to take a hard look at your credit rating. And you want financial help but don't want it to cost you money? Perhaps your unrealistic view of the world is what caused you to be in the mess you are in.

[Lili]

I used to lend money to the people and friends I know, but I never get the money back. When people need money, they came to me and promised me they will pay me back. But later on, I saw them having parties and enjoying life, but they didn't want to pay me back.

Family members are worse. my sister in law asked us to borrow her 1500 dollars and promised me that she will pay back in 5 months, years has passed by, she doesn't even mention it and I know it is like queeze the blood from a rock, forget about it. Recently another sister in law asked us to co-sign a 45,000 loan. She cried and teold her how much money she owns the whole world. I told my husband ONO WAY this time since this sister in law has 2 houses in different states, she had ton of gold and 6 dogs, why should she live like the rich and doesn't change her life style? She spent money like crazy when she had money. But we have 4 little boys and renting a apartment now. I know we have money in the bank, but it is our hard working money. I save every penny I can for our family, I will not lend this sister any money, either will my husband co-sign a 45,000 dollars loan.

My rule in life is I don't borrow and I don't lend. In that way I have peace in my mind.