At one time or another, we’ve likely all been asked, “Hey, can I borrow some money?” Whether it’s five dollars or $500, this can lead to a sinking feeling in your stomach. Even the most generous people don’t want to feel taken advantage of, and we all know the risks of loaning money to friends and family. But we also want to help out someone we care about who’s in a tight spot.
Take a look at the cases for and against lending money to friends and family and how you can handle each situation the best way possible.
The case against loans.
The main reason to not lend money to someone is that you may not get it back. If someone asks you for money, it may be they haven’t handled their own finances wisely and/or a financial institution won’t give them a loan. This person has now turned to you, a friend or family member, because they can’t get the money elsewhere.
If you then make the loan and are not repaid, the relationship could be in jeopardy. You may be angry over the loss, and the borrower may feel guilty and avoid you over not repaying. Or, possibly worse, they don’t feel bad at all, and now you’re even more upset! According to one study, 46% of people who lent out money said it didn’t work out well.
Finally, if you lend money and don’t get it back, it could be even worse if you end up needing the money yourself. While you should never give more than you can afford to lose in the first place, you never know what may come up that could put you in a financial bind.
How to say no.
If all the above resonates with you and you make the decision to not lend money, there are three ways to make it a bit easier:
- Create a policy of never lending money. If you decide being a lender is not for you, go ahead and make a personal policy that you won’t lend money. To anyone. Ever. For any reason. It may be hard to stick to, but creating a hard and fast rule will make any requests that much easier to turn down.
- Practice saying no. Go ahead and come up with your list of reasons why you might say no, just in case the situation arises. You can say, “Our relationship is just too important to risk it.” Or, “I’m not in a financial position to loan money right now.”
- Offer help in other ways. There may be other ways to support someone so you don’t feel you’re leaving them high and dry. If someone is out of work, you could help them with their resume, introduce them to professional contacts or even gift them a membership to a networking organization or career coach.
The case for helping out.
Despite all the reasons against loaning money to friends and family, there are obviously reasons why people do it anyway. First and foremost is the desire to help someone out. We’ve all been in tight spots in our lives and could use a helping hand now and then. The golden rule—do unto others as you would have them do unto you—has also been drummed into our heads, so the idea of turning someone away in their hour of need may feel worse than losing money.
You may also have the money to spare, so giving some away is an easy decision. It can feel good to make an investment in someone else and know that the funds made a difference in their lives. And there are, of course, many situations where you know the friend is trustworthy and the likelihood of being repaid is very high.
How to loan money well.
If the benefits of making the loan outweigh the risks for you, then there are three things you can do to make the process as smooth and positive as possible:
- Assume you won’t be paid back. If you go into the loan with the belief that the money is a gift and you’ll never see it again, there can be no hurt feelings if that money disappears. It can also be a happy surprise if you are repaid!
- Only say yes if you mean it. Lending money is a financial decision, not an emotional one. If you feel guilted or coerced or you don’t really have the money to give, you need to say no.
- Make it a business deal. While it may feel awkward, the more formal you make the lending process, the more likely you are to get paid back and avoid a damaged relationship.
Put the terms in writing including how much you’re loaning, interest charges, the loan due date, repayment options and even terms of how late or non-payment may be handled. The greater the amount of the loan, the more formal this can be from a simple email, to an online contract through a site like LegalZoom, all the way up to involving a lawyer.
Ultimately, the choice to lend money to friends and family is up to you and may vary case to case. The best decision you can make is the one that is both financially sound for you and that you can feel good about.