What are the pitfalls of loaning money to friends or family? Is there a right way to do it?
There are two levels to consider here:
- Small amounts (To me, this means $20-30) - Just do it, if they pay you back, everything is fine. If they don't, it's not going to kill your friendship. In the latter case, don't harp on them about it just let it slide and don't loan them such money again
- Larger amounts - In general, don't loan them money. If you can afford to lose the money just give it to them as a gift. I usually give them the money saying something like "If you need this money, just take it, if you want to pay me back, great. If not, that's okay too". If you aren't prepared to say that, loaning them money is probably not a good plan.
That said, before loaning/giving anyone money ask yourself if it is good for them. If they have problems managing their money, or holding down a job, and you give them money, they are just going to come back for more later. In this type of situation, you shouldn't give/loan them money. But on the other hand, if a friend or family member has hit a rough patch and you know they are the kind of person that will be on their feet again soon, and you have nothing to lose, give them the money.
The big problem with lending money to friends and family is that if things go sour with the deal than you can lose something a lot more valuable than the money associated with the deal. As a result of that I no longer lend money to friends and family. If I have the extra money available and I know someone is really in need I'll give them the money no strings attached before I'll lend any. If they decide to give back the amount given at some point in the future so be it, but there will be no expectations.
Thanksgiving dinner just has a different taste to it when someone at the table owes someone else money.
I recently lent some money to my sister. While I generally agree with Phillip that lending to family and friends should be avoided, I felt I needed to make an exception. She really needed the cash, and my husband and I agreed that we would be ok without it. Here are some guidelines I used that may be helpful to others:
- Make sure you don't need the money. (And ensure your partner agrees!) Run through the scenario of never getting paid back. If you won't be ok without that money, then you just can't afford to lend it.
- Be clear about your expectations. Write up a contract if you really want to be official. With my sister, I simply wrote an email with all the specifics, so that both she and I would have it to reference if there was confusion later about what was due when. Include when payments would begin, their amount and frequency. Talk with the borrower to ensure that your expectations are realistic.
- Keep track of payments carefully. Use checks, or give them a receipt.
- Talk directly about concerns for your relationship. Be honest with yourself about how you'll feel if you don't get paid back. If you feel that you wouldn't be able to get over it, then it's not worth risking your friendship, and it's fair to tell your friend that. Agree ahead of time that this is a business deal and you'll both work hard to not let it influence your relationship.
In the end, I think lending to family and friends should be avoided, and certainly should not be done lightly, but by communicating clearly and directly, and keeping careful records, I think you can help someone out and still avoid the lingering awkwardness at future Thanksgivings when one person is convinced that the other owes one more payment, and the other swears it was paid in full.