Should You Loan Money To Family and Friends?

Let’s pretend were in a down economy. (Hard to imagine, I know) Now, assume that you are fortunate, despite that poor economy, to still have a secure, well-paying job. And, since you’re a frequent reader of Dough Roller, you know how to stretch your dollars as far as the eye can see. You also have a comfortable cushion of savings, at least six months worth of your personal expenses. Long story short, you’re doing very well.

Then one fateful day, you get a phone call from a friend or family member who’s in a financial bind. They’ve started a new job with no base salary; all their income is tied to sales. They expect to start generating real income once they manage a few sales, but their supervisors tell them that process could take 4-12 weeks. They ask you if you can help tie them over.

Loaning money to a friend or family member is always tricky. Without proper paperwork, recouping the money can be very difficult. (And who wants to wind up on a courtroom drama show, trying to explain to Judge Judy why on Earth anyone would loan a friend money?)

This can also ruin a friendship very quickly. Your friend may think you’re scrutinizing their every financial decision. And, you may very well find yourself doing just that, wondering why it is your friend is spending a bit of money at TGI Friday’s instead of paying you back. But, assuming your desire to help outweighs any reservations you might have about spoiling a good friendship, here are a few hints for how to make sure the financial end of your decision is sound.

  • Find out why it is that your friend needs the money – If it’s because they’re out of work, ask how soon they think they’ll be employed. If your friend or family member is steadily employed but needs a large sum unexpectedly for an unforeseen expense, the risk to you is much lighter.
  • Make sure you have a clear idea when you can expect the loan repaid – Having clear expectations is good for both financial planning, and for the friendship.
  • Know whether they’ll pay you back in a lump sum, or in small payments – It’s another thing you need to know for sound financial planning. Knowing you’ll get the money back slowly may affect how you allocate your other funds.

Here’s one last thing to consider, if you’re on the fence. Sure, a loan can ruin a friendship and you’re putting a great deal of trust in your friend to pay you back. It’s a risky proposition on all fronts, but consider the potential rewards. If they pay you back, you’re seemingly right back off where you started,and actually a little bit ahead.

Your friend will always remember that time you helped them out, and will likely be there for you when you need a helping hand.  Remember that favor is worth more to the individual receiving it than the individual providing it so pick and choose who and how you help others wisely.

Published or Updated: September 7, 2011

Comments

  1. Vytas says:

    I think that retaining a good friend is very important. One might consider a possibility not to lend at all to a friend or give without expecting getting it back. Much depends on a situation. A friend in need is a friend in deed…

  2. hkia says:

    There’s a situation in which loaning to family and friends makes a lot of sense. A few years ago, my father was buying a house and had the choice between taking out a mortgage or borrowing from friends and family. His idea was to pay everyone interest rate that was lower than he’d pay to a bank but higher than we are getting from our savings. He basically cut out the bank as the middleman in the loan. Of course it was implicitly unerstood by all of us that my dad was a good credit risk and we had no doubt about collecting. Of course this may not be a common set of circumstances but we all made out well.

  3. Michael says:

    If I may…. our service can help facilitate a loan between family and friends. We offer an easy to use and flexible online service that helps setup and track a person to person loan. Check out our site, http://www.LendingKarma.com for more details.

    • Annie Mack says:

      Is there nowhere that a spammer will go? Your service may be great, but you are intrusive.

      • Michael says:

        Oh Annie I can see that it’s been super intrusive and created a huge amount of noise to this discussion over the past year with the 1 other comment that was added until today. I posted a comment that was quite pertinent to the discussion, I wasn’t just link building.. that’s what a spammer does.

  4. purchase order sample says:

    In my opinion, these days there is no need of loaning from friends or family people. Today almsot each and every bank is offering attractive loans. Getting loan from a bank is no more a rocket science now. One can easily get loans on easy installment. Then why to ask some one. It may embarace you.

    • Annie Mack says:

      I’d like some of whatever you are smoking! Each and every bank today is holding onto their money for dear life. I have a very well-off friend who helped us purchase our home. We had all the proper paperwork to protect both of us. We paid our loan to him every month and we all benefited for the deal. We would have paid thousands more to the banks and we are very grateful to our friend.

  5. Yaa it’s true we all give money to our relatives and friends without investigating more because we think a friend in need is a friend indeed.We get ditched many times when we dont have our money back so I think your idea of loan to a friend is great. I admit we may get wrong so first of all try to know reality of friend does he really need money then help him.Thank you so much for sharing with us.

  6. Melissa says:

    My grandpa always said that loaning money and gambling are the same. Only do it, if you can afford to lose it.

  7. Pam says:

    I think this is a very difficult topic. In some cultures it is commonplace to lend to family members and friends without question. But in Western cultures we are more likely to count the costs before lending out our hard earned cash. I think Melissa’s grandfather is right: If you cannot afford to lose it, it’s probably best not to lend it.

  8. Kathleen says:

    Money with friends and family should be a gift not a loan, it avoids disappointment and drama..

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