How to lend money to friends and family(Read article summary)
Lending money to your loved ones isn't a great idea, but if you must do it, there are a few tips to make the process as painless as possible
One of my basic rules of personal finance is never loan money to friends or family. It creates a lender-borrower situation that you just donâ€™t want to mix with friendships and family relationships.
Think about it this way: do you like your mortgage holder? Do you feel warm, friendly feelings about them? Thatâ€™s the result of a lender-borrower relationship and when you lend money to friends or family, thatâ€™s what you add to the equation.
Yet, time after time, I get messages from readers who seem completely convinced that lending money to their friends and family is the right way to go. Theyâ€™re going to do it, no matter what I suggest, because there is some social reason why they believe itâ€™s the right thing to do.
I absolutely believe loaning money to someone is a horrible idea, but if youâ€™re going to do it, hereâ€™s how I would go about that process.
First, assume youâ€™re not going to be paid back. From your eyes, think of the money youâ€™re lending as a gift. A very high portion of personal loans are never repaid and if you expect to be repaid, youâ€™re going to be disappointed and youâ€™re going to start injecting negativity into that relationship. Be aware of that right off the bat and donâ€™t expect to be repaid.
Hand in hand with that assumption is the realization that you should never loan money that youâ€™re going to need in the future. If youâ€™re going to need that money to survive, donâ€™t lend it, period. Only lend money that you could live without â€“ money that would ordinarily go to non-essential items.
When you loan the money, make it clear to the person that youâ€™re not worried about when youâ€™ll be paid back. Make it clear that they can repay you on their own terms, because when you start setting terms, youâ€™re creating a relationship-damaging lender-borrower situation. Let them pay you back when they can.
At the same time, make it clear that you wonâ€™t loan to them again until this is paid back. You do not want to become a well of support. A loan is just that â€“ a single shot of money intended to help them right their ship again. You are not a means for them to get by. You are not a method by which they donâ€™t have to start taking responsibility for their actions.
Once youâ€™ve loaned the money, donâ€™t bring it up. In fact, the best thing you can possibly do is just to completely forget that youâ€™ve loaned any money at all. Since youâ€™ve not set any terms on having them pay you back, simply allow them to figure out their situation and come up with a repayment plan. If they donâ€™t, well, you didnâ€™t expect to get the money back anyway.
If they ask for another loan, say â€śnoâ€ť unless youâ€™re really willing to give up more money. If you do say â€śno,â€ť simply point out that you previously told them that you would not loan them more money until the earlier loan was paid back. This is an easy and very clear response, as it puts the onus of trust onto them, not onto you.
As I said at the start of this article, this advice only matters if youâ€™ve decided to loan money anyway, even though I generally consider it to be a really bad idea. If youâ€™re considering loaning money to a friend or family member, please think it over carefully before doing so.
I have made the mistake of lending money to family and friends in the past. Eventually, I had to accept that this money was simply gone. If I had accepted that idea from the start, I wouldnâ€™t have damaged any relationships in the process. Instead, I could have continued to be a part of their process of fixing their life.
Donâ€™t let money get in the way of your friendships or family. Avoid lending money if you can, and if you must, make it as unintrusive as possible.