Lending money to family or friends can be an awkward decision. On the one hand, you want to help out a loved one in need, but will you ever get your money back? If you want to help, but think that helping them out with a loan will only make things worse, then here are some things that can help improve a stressful situation.
Give a smaller gift
If you don’t feel comfortable lending money to people in your life, then consider gifting them a more acceptable amount. When you give a gift, you’re not expecting to see the money again, so you don’t have to figure out a payment plan or worry that they won’t pay you back.
By giving a smaller amount, you won’t be putting your finances in danger when giving a smaller amount. Also, by making it a gift, there are no strings attached, so there won’t be any reason for hard feelings down the road.
Offer to help with a budget
If you honestly feel like this is a situation that will repeat itself, then you may want to offer help with budgeting. Perhaps you could show them how you’ve been able to improve your finances with some simple tricks.
If they don’t want to open up about their finances with you, you could offer some other helpful gifts:
- Quicken: This is a great piece of software and if they are tech inclined, it could help their finances tremendously by streamlining it. They can do cash flow projections, budgets, and track their investments and savings. It’s a very handy gift to share.
- The Total Money Makeover by Dave Ramsey: This is a wonderful guide on how to get out of debt, get started on savings, invest for retirement and college, etc. Dave Ramsey’s method works, so if you want to help jumpstart someone’s finances, this is a great book. I’ve given this book out to others and, while some don’t follow it (“it’s too hard!”), many of them have picked up some tips that have helped.
- I Will Teach You to Be Rich by Ramit Sethi: This book, like The Total Money Makeover, is more than theory; it shows you step-by-step how to organize finances into an extremely manageable system. There are actual scripts that can be used to get fees waived at the bank, interest rates lowered on their credit cards, and so on. It’s also very pointed, so it may be the kick in the pants that they need.
I also recommend Your Money or Your Life and The Millionaire Next Door as great gifts, but they are more food for thought. When your relative has gotten out of their current crisis, they may be more inclined to sit down and examine the big picture when it comes to money.
By giving these sorts of gifts, you’re teaching your family or friends to fish rather than buying them fish every time they’re hungry. If they respond to what you show them, then you can help them improve their finances.
Empowering loved ones to understand and use basic money principles can not only keep them from asking for money, but it can also help your relationship. They’ll be more independent and in control.
If they don’t listen, at least you’ll know that you gave them the tools to succeed. Every time they ask for a bailout, you could ask them if they used the software or read the book. You’ll then have a better idea if this is a situation where you want to help them or not.
Lend money on your terms
Perhaps you’ve decided that you want to help out by lending them some money, but you want to make sure that you’ll get paid – and that you won’t have to be the bad guy if things don’t work out as planned. Consider encouraging them to borrow via a peer lending platform.
While it might seem strange to use a third party to broker the loan, this might be the perfect solution. Lending Club can vet their application, and also help to reduce your financial commitment – after all, other “investors” will have the option to pitch in and help out.
Advise your would-be borrower to fill out the paperwork and apply for a loan. Lending Club will be able to measure objectively whether or not they are a good candidate for a loan.
What if they get rejected? That could be a sign that simply lending them money won’t help to solve their financial problems. You can then decide if you still want to go ahead and lend them the money on your own – probably not a good idea – or choose another path. It may be a jolt to their ego if they get rejected, but it’ll also give them a chance to see their financial situation clearly.
Just say no…
This can be hard to do, but sometimes saying “no” is the best way to wake someone up to their financial problems. If you think that saying no is too harsh, here’s a suggestion that can help you get your relative to a more proactive role in their finances…
If your relative is hard up for money, you might want to turn them on to SmartyPig, which is essentially a high yield savings accounts with a social component.
Not only do they give you bonuses if you’re saving for purchases at specific retailers, but they also provide a mechanism for sending gifts. Gifting a small amount into their account can be a great way for you to get them started on their way and to encourage them to save for their goals.
Your thoughts on lending to family
Have you ever given a loan to a family member or friend? If so, was it for a significant amount? How did it work out? Did you get your money back? Were there any hard feelings? And would you do it again in the future?
15 Responses to “Alternatives to Lending Money to Family or Friends”
When anyone asks us for money, I tell them how badly we feel about it, but my DH and I have made a pact with each other not to lend after we were severely burned by his sister.
We lost the money, the relationship, and our peace of mind. Even though we gave her the money, she still resented us and demanded more. As soon as we said, “no more”, she hated us as if we had stolen HER money. It’s called entitlement.
The question I ask someone who asks for money is “what else can I do to help?
If you have the money give it. I’ve always wanted my friends and Family to know that if they needed something they could ask. If your brother has kidney failure would you deny him one of yours? If yoaur friend needs a piece of your liver do you deny him? IF the answer is no then they aren’t really your brother or your friend. They’re just people you know, aquaintances. Then how can you possible think of refusing them such a tiny request as money. Filthy stinking money. A slip of paper that if you are smart and careful yourself, you can make more of and probably have more than you need. It amazes me how selfish petty and greedy we have all become.
I now steer clear of people who mention money problems. I have a friend who emails me every week, complaining about all the bills she must pay, the surgeries that she had, how her eyesight is bad and she is going blind, etc. She keeps wanting to get together with me to “talk and catch up.”
I am wise enough to know that I may be asked for a loan at one of these sessions. So I am constantly “busy”, don’t pick up my phone, and tell her that we can keep in touch by email. Anytime you have an inkling that someone will ask you for money and will NOT pay it back, just steer clear. Problem solved.
This issue I’ve sometimes found is the asking itself sours the relationship. If I say no, the person is resentful, thus creating awkwardness. If I say yes, and the debt is never repaid, or I have to keep asking for the money, the person avoids me. It’s a no-win situation.
As a rule of thumb, my husband and I don’t “loan” money to family or friends. If we are fortunate enough to help someone financially, we will “lend” the money but we both consider it a gift. Once we give the money, we never mention it again. If it is repaid, we consider it a bonus. We learned early in our marriage to never give what you don’t have. Unfortunately, this was a hard lesson for both of us.
That having been said, deciding whether to help either a friend or family depends on how much you value the relationship. If the relationship is more important than money, loaning/lending is guaranteed to sour the relationship if it becomes a “debt collector” type of situation.
However, our generosity has limits too. We will not enable anyone that continuously makes poor financial situations nor will we “lend” for other peoples indulgences. (My in-laws once helped a friend in need only to find out that she went on a 7 day cruise with her daughter to celebrate her college graduation!) In this situation it is easier to say no and preserve the relationship than repair any awkwardness/animosity that may result from an unpaid loan (s). If family or friends are spurned by our refusal, there wasn’t much of a relationship to begin with.
This is such a tough subject. I really like the suggestion that family members should try to help each other with budgets and taxes, rather than gifting money. Although, if a person feels the need to help financially, they should learn the right way to lend.
1. Always find the reason for the loan – is it for a trip to Hawaii or to pay off utilities bill/ car insurance.
2. Calculate how much you can afford to lose in case you don’t get the money back. This is the worst case scenario, but not rare.
3. Always give money as a loan. I typically give out money as a loan @ 1% and spell out the duration.
4. I clearly specify if I don’t receive the loan back, there won’t be future loans.
5. Keep the money matters separate during social settings.
I loaned $3K to my mom when she got laid off because I didn’t want her borrowing from her 401k. She did it anyway (and couldn’t qualify it as a loan, so she basically just took the money out with the tax penalty), so I feel like lending her our hard-earned money was for naught. At first, I was so certain she’d pay me back b/c she’s one of those who can’t sleep at night if she owes money to anyone. But now it’s been 6 months, and she’s still not found a job. There’s a little nagging voice in my head that’s fearful she’ll never pay it back. It would be OK, except I really had to convince my husband that she would pay it back. If she doesn’t, it’ll be awful. But even if she does pay it back, I’m now thinking it’ll be years before we see the money again. I thought I knew better than to lend to family. I’ve had to learn my lesson the hard way.
In general I never loan money that I’m not willing to write off as a gift. That keeps any amount smaller and hopefully out of my own financial woes (instead of counting on “pay you back on Thursday” that never comes and the cascading effect). Also, it maybe good to have given a “loan” on a small out, for it seems a pattern of escalation, however if there is still an outstanding balance of $20 or $50, that “just say no” part becomes a whole lot easier against the pleas.
Unless the leak is fixed, the water bill will stay high.
We have a relative who is always living on the edge. Her oldest sister constantly bailed her out. Then she died. We’ve helped on ocassion, even sending budgeting information, and refused her this last time. The broke person resents us, saying we’re rich, and that we should be helping her out. We’re not rich, just very, very careful. Last year was a killer for us. $10,000 in out of pocket medical expenses. When she was told this she stopped asking. Have no idea how she’s managing. She stopped talking to us.
When a relative was starting out after school, I gave him $5k towards a newer used car so he could have reliable transportation to get to work. I knew that he had no way to repay me, so I made it a gift and gave him the option of repaying if he ever made it big in life. Five years later, this same person got laid off work and asked me for $4k loan. I was hesitant but did not want him out on the streets. I had a healthy emergency fund, savings, investments, so $4k was not a big deal to me. Within three months, this person got another job and deposited $500 into my bank account each month until the $4k was paid off.
I had another relative lose their job at about the same time as the first relative. I loaned this person over $4k. It took her over one year to find another job. When she did get a job, she tried to hide it from me so I would not ask her to pay me. I found out and asked for payment. She tried to get away with paying $25 every month. Meanwhile, she bought unnecessary items like clothes, shoes, perfume, and other junk.
She was in no hurry to pay me and did not care that I got only $25 a month. I finally told her to pay $75 or more each month. She was not happy, but other relatives intervened and pressured her into paying $75. This person will take years to pay off her debt. I did not charge interest in our agreement (we signed a contract), which was my mistake.
I could have invested that money in a gold mutual fund that earned 53% or more, so in addition to not having my money, I am losing out on interest big time. This person is selfish and ungrateful for my assistance. After I saw how she treated me over the loan, I never helped her out again. I used to give her all sorts of things from my home. Now I give her nothing.
To anyone who is considering lending $1k or more to a relative, my advice is DON’T DO IT. My first relative was hard working and responsible. My second relative would not have paid if I had not threatened civil action. When you lend to a relative, you don’t know whether you will get the first person or the second person as a borrower. Don’t risk your money.
As for loaning to friends: don’t even go there. IF I can’t trust my own family to treat me right, how can I trust a non-relative?
I’ve been party to lending money to multiple friend — always a friend of my husband’s, always my husband’s desire to lend the money to help a buddy out, always under protest by me (like that did any good). So now we are owed upwards of $20K by various “friends” who will most likely never pay us back, and it literally makes me sick. The only way to get anything is if the friend has a valuable (to us) talent or skill. One guy who owes us $9,500 is a decent carpenter, so we won’t be buying any bookshelves — he’ll be making them. Another happens to be a mechanic who also does a lot of car repainting work, so he repainted DH’s motorcyle after a crash crunched all the painted parts. Of course, in cases like that, the person who owes us and does this other work often insists it’s worth more than DH or I think it is, thereby working off way more of their debt than maybe should be the case. But at least DH got a decent paint job on his bike…
Do you sense my bitterness? The bottom line being – don’t lend, just don’t. Beware that pretty much anyone who’s in a position of needing a lot of money fast probably isn’t that great at managing their own and therefore will not necessarily be all that great at paying you back. On the other hand, if you can give money and want to in order to help someone, go for it, then wipe your hands of it and be done.
I have offered to help budget… doesn’t usually work. I think the ‘prying into their disaster of finances’ thought deters them from accepting.
However, since I have been sent wonderful financial books to review – I give them to friends in need. And that is usually always accepted with gratitude.
And if you do lend to family, you basically need to consider it a gift. If you’re lucky, you’ll get the money back. but don’t rely on it.
Good tips for thought.
I learned a hard lesson about lending a friend money when I was 22. I didn’t have the $500 cash to lend, but my friend was very hard up. She had been staying with me for the past 3 months while she looked for a job and needed money for transportation and other personal expenses. Using up favors, I got her an interview at two premier museums in NYC. She was offered the job at one of the museums, and turned it down because it didn’t “pay enough.” To say I was shocked is an understatement. The friendship ended after that.
Your tips are all good ones, that I wish I knew back then.
One approach I’ve seen used by other people is to purchase something that they are trying to sell. The first example I can think of was a friend’s Dad buying a DJ Karaoke machine from a relative who was hard up for cash. He didn’t necessarily need or want the machine, but he said he was going to give the relative the money anyway, so he might as well get something out of it that he could use and maybe re-sell later on.