I’m willing to bet that most of you have either loaned money to friends and family, or have been asked to do so. How did the experience pan out for you? Were you able to maintain a sound relationship with that person, or did it suffer because of the money?
Over the years, I have developed a sound strategy to deal with this issue of lending money and would like to share it with you today.
Should you lend money?
The answer to this question is rarely simple. A lot of times the person in need is a loved one, or is perhaps connected to a loved one in some respect (e.g., an in-law). Regardless of who is in need you should always handle the situation with a good deal of tender wisdom.
Gather background information
If you are being asked to lend money, do not feel guilty about asking all the right questions! After all… It’s your money, you worked very hard to save it, and the last thing you want to do is hand it over to an irresponsible steward.
What is the character of the person in need? Have they been irresponsible with their money, or are they truly in need thanks to unavoidable circumstances? Do they have a solid track record of repaying their debts, or are they likely to leave you hanging out to dry?
Consider asking for an up-to-date credit report to help you make a properly informed decision… Banks and businesses do it, why shouldn’t you? 😉
Consult your significant other
If you are married, or in some sort of committed relationship, be sure discuss the situation with your partner – spouses are typically able to raise points you may have otherwise missed because they approach things from their own unique perspective. Not only that, but spouses deserve equal say in the decision since such financial matters will affect them as much as it does you.
Decisions made together means consequences are dealt with together… An equal share of responsibility will helps avoid the blame game and makes for a happy home!
Can you afford to give the money away?
One way to approach lending money is to avoid it altogether unless you can afford to give the money away. The fact that you can afford to give the money away does not need to be disclosed to the borrower, but being able to do so puts the lender on solid ground, even if the money is never fully repaid.
Unless a trustworthy loved one has a dire need with which you desperately wish to help, if you cannot afford to give the money you may be best advised to avoid lending at all.
Can you give the money without holding a grudge?
You may be able to afford giving the money, but are you “okay” with giving away the money? If you hand over your money, you should probably do so with no expectation of seeing the money again. As previously mentioned, informing the recipient that you do not expect to see the money again need not be disclosed, but having this mindset is essential if you wish to maintain a relationship with the borrower.
As far as you are concerned, the money is gone, but to them it is a debt that they fully intend to repay. If they cannot repay the loan, you hold no grudge. If they do repay the loan, you have money extra money you had already accounted as spent. Both parties win.
Honorable borrowers will commonly offer to repay the debt with interest. Deciding whether or not to charge them interest is entirely up to you and should be decided on a case by case basis. Even if you can afford to give the money away, have already discussed it with your spouse, and are okay with never being repaid because you see it as a gift… you can still charge interest.
If you chose not disclose the fact that you are fine with never being repaid, then the recipient will see the gift as an interest bearing loan, just as they would have secured from a financial institution. If they cannot repay the loan you hold no grudge. If they do repay the loan then your gift has now turned itself into an investment with more meaning than your average high yield savings account. 🙂
Do I lend money?
Personally I never loan money, I only give it away. And I only give it away if my wife is on-board, we can afford to do so, and both of us agree that the money is truly a gift… With no expectation of repayment. Lending money in this regard has always worked well for us, has allowed us to help loved ones, and has saved several relationships to date. 🙂
What about you?
Do you have any stories about lending money… Good or bad? Let’s hear about them.
13 Responses to “Thoughts on Lending Money”
I watch my mother in law spend like she is a millionaire, she even bails my sister in law out of debt, pays for her mortgage and buys a crazy amount of crap for her children. My partner and i have helped them once before and paid the in laws rent etc(after they went bankrupt and had the house ceased by the bank)plus various other smaller amounts of money. After a few years you would think they would have learnt from their mistakes? well no, because they figure they dont have a mortgage so they can spend more.. and we now have to loan them thousands of dollars, 6months before we have to pay for our own wedding and honeymoon, and we have our own mortgage to worry about, oh and iv been dignosed with graves disease (so iv been feeling very awful and now have to spend money on medication and specialists and what not) i get no say in where MY money goes because they are ‘his parents’ *plays tiny violin* and raised him, he gets extremely angry when i say we JUST CANT AFFORD IT!! they get up my partener for working weekends but thats when he makes the cash!!!! i resent them having to ask for money!!! save it, dont spend it and you will have the same as us!
I always give the money to them if it is not too much (under $100). I always am willing to help people in need and lending it to them will keep them even further behind longer.
If it is a larger amount I would consider asking for collateral, like a pawn shop does. Maybe some jewelry or something. Then there is a motivation for them to pay you back. If they don’t, sell their stuff!
Keep the communications open and write it down so there is no questions or misunderstanding. They can’t get mad at you for selling their stuff since they are the ones that didn’t pay you back.
I had to borrow $2000 from my parents when I moved to my current town. My new job pays monthly, so there was almost 2 months with no paycheck, which included Christmas and all moving expenses. I was going further into debt each month with my old job in my old town, so there was no good way to save the cash I needed for the move. I paid them back in less than 2 months, but I work for them on weekends in the summer so if I had not been able to pay them in cash, I would have been able to work it off.
There are times that they owe me over $1k in wages but I always use those funds to buy things that they can write off as expenses and I cannot. Any tools, tires, or computer parts can be purchased by my parents’ business to pay for my help.
I once loaned over $500 to a friend who was in trouble. She’d kicked her alcoholic husband out and had two little girls to support with a very PT daycare gig and her side job of cutting/styling hair. Rent was overdue and I’d been in the “about to be evicted” situation, so I felt bad for her.
Although it made me feel good at the time, I later found out that she was counting on her Dad to give her some money (he didn’t), so she spent a lot of what I had loaned her on Christmas presents for her girls. I’m not heartless, but I just don’t see why a five year-old needs an iPod Shuffle–especially when funds are tight.
I helped her find assistance programs (free school lunches, free after school childcare) and was incredibly supportive. All she had to do to pay off her debt was to do my hair for free for a year or so. Then she moved without letting me know her new address. Never returned my phone calls (I’m guessing she got back with the alcoholic deadbeat husband and was too embarrassed that I find out about it), never got repaid or heard from her again.
Always assume any money you “loan” is actually more of a “gift” so there are no expectations you’ll ever see it again–because quite often you won’t. And never lend more than you can afford to give away.
I let a friend borrow money once. I really didn’t have the money to lend at the time but I did it anyways. The friend paid me back and everything was good. Until they asked again. And again. And again after that… Lending the money turned out to be a mistake b/c it opened the door for future requests.
I don’t lend money anymore, at least not to friends. If close family was in need then I would try to help. The realty is that I work very hard at keeping me and my wife’s financial world in order and I won’t let anyone jeopardize that. Maybe someday things will be different and lending money won’t be such a big deal. Until then – the answer is “Sorry…”.
I really liked hearing Floridian’s story of using an intermediary. Sie was still responsible for the money, but it created a nice emotional barrier.
Once, when I was in college, a room-mate situation got really ugly after she went broke. My parents ended up paying to get us out of the situation and she was supposed to us back the money over time. It wasn’t a lot, but somehow I got emotionally invested in it and it wrecked the friendship.
Big lesson learned there.
Since then, I have learned that the best thing to do is to sit down with the person and explain that my relationship with them is too important to mess up with money, and that I will need to be absolutely blunt about the expectations. Last time I loaned money it was to my boyfriend at the time and I actually had a lawyer friend of mine point me at a boiler plate legal loan document for us to draw up. And the loan did include interest and terms for repayment. I never did collect on that loan because we got married, but I think it really did help keep us from bad feelings over the whole thing. Having the legal document disconnected it from our relationship entirely, and made it just a separate business relationship.
I have a complex situation with my MIL at the moment that may involve money at some point in the future, so I’m really keen on hearing other people’s experiences. With the exception of that loan to my (now) husband, I have not done any loaning, just an occasional gift…mostly because I suck at the grudge part.
Oh, one last thing of possible relevance is that my brother and I started a joint account together when we were in college. The purpose of this account at first was to serve as a joint emergency fund, but 13 years later, we have only ever used it to buy joint presents for our parents. We have now re-purposed it to serve as an emergency fund for our parents (that they don’t know about) in case they ever get themselves into a situation where they need our help. You obviously have to have a lot of trust to do something like that, but I’m lucky with my brother. I think it will really help us if my parents ever need a “loan” or financial help.
When I got out of college, I trashed my credit. My parents loaned me money to get the debt collectors off of my back — for which I am forever grateful. In the meantime, I’ve been slowly paying them back.
Fast forward a few years, and my lot in life has very much improved. I can empathize with Spoco — my wife’s family has made some extremely poor financial decisions with their life.
My brother-in-law (wife’s sister’s husband, who are both bit older than we are) does quite well for himself, and I’ve seen him more than once “step up” when the others are a bit “short on cash.”
Before we got married, my wife and I had a talk (or should I say, I told my wife) under no uncertain terms will I ever be loaning her family any money. (She’s finishing school, I work.) She did tell me that no family member of hers would ever sleep on the street if she could help it, but short of that, understood. I told her that if things got that bad, then we’d at least talk about it. But I don’t have any intention of rescuing them from the compounding effects of years of bad choices.
I also told her that I don’t plan on making any “gifts” in the way our brother-in-law does, and I hope her family understands that.
As far as the gifts thing goes, though, it’s more to do with our financial situation than selfishness. Although I make a decent salary, I live in a really expensive area, and have a boat-load of student loan debt. If we were “gifting” money we would never miss a couple of times a year, that would be one thing, but we’re a long way from that. Until many of our financial goals are met, even a $200 gift is non-trivial.
This has been a point of contention between my spouse and me. He feels “hey, it’s just money” and I set a certain higher level of significance to it because I don’t want to end up living in a box under a bridge after we’ve squandered all our money on his poor friends.
Right now, we have outstanding “loans” to friends of approx $15,000 all together. And it irks me no end, since most of the people on the receiving end seem to have no interest (pun intended) in paying us back after falling all over themselves promising up front that they would pay it back absolutely!
The only grudge I truly hold, however, is to the most affluent of the borrowers who wrote out a really generous repayment plan for himself (he gets to pay us back monthly in whatever amount he has each month with no interest for as many months as it takes). In spite of how generous he was with our terms, he has made only three payments since his repayment plan supposedly kicked in a year ago. So he can’t even stick to a plan that basically says he can give us a dime a month if he feels like it. What’s he doing instead? Buying crap on ebay. It’s cheap crap, like old motorcycles and old trucks that he “fixes up” by buying more old crap on ebay.
Since my spouse and I are currently separated and discussing finances as part of a divorce settlement, I’ve made it very clear that spouse will be paying me my half of that affluent friend’s loan and then he can spend the rest of his life trying to collect from his friend. I’m done with lending to his friends. My friends don’t ask 🙂
When I think of lending money to my sister in law the only thing that comes to mind is the saying “FOOL ME ONCE, SHAME ON YOU; FOOL ME TWICE, SHAME ON ME”. UGH. The first time I met her we went shopping and she told me to buy something for her daughters and her mom said she would pay for it. At that point I didn’t know any better and I was shocked when I returned home and asked her mom (who would later become my MIL) for the money and she had no idea what I was talking about. Fool me once. Then 2 christmas’s ago she was going through a divorce so she asked me if I could put something on my cc for her for her daughters and she would pay me when we saw them at Christmas. Well, it was over $300 and I was shocked when I only got $100 when we saw her and she told me she would pay me the rest in about a week or two…or never actually. Her mom ended up giving me the rest of the money. Fool me twice. NEVER AGAIN!
I have lent far too much money to a close friend over the years, and the debt to me only grows. It was pretty much an effort to stabilize things, but as the years passed, I’ve grown to realize that I’m only hurting myself in the long run. I’m trying to pay my mortgage off quicker, and look at the money that I used to have (and still not fully repaid) with a great deal of regret.
My mother asked me for a short term (one month) “emergency loan” to get her through Christmas a few years back. My mother is HORRIBLE with money – and we’ve watched her (and begged her to stop) continuously bail out my no-good sister and pay her expenses MANY times. We always knew that one day she would probably be asking us for money, but I was still not prepared when she actually asked. I discussed the request with my husband (thank you for making that point in your post!). We knew it was a very small amount for us and we would never miss it. BUT, just saying yes that one time would probably open up the flood gates to future requests. In the end, we decided we wanted an intermediary, so I cosigned on a loan to enable her to get the funds (banks/credit unions wouldn’t loan to her alone b/c her credit was in the toilet). That way, she was responsible to the bank, and not to us (but we knew we were responsible for the payment if she didn’t make it – and I called on the due date to make sure it was made). It also added a little pressure for her to make the payment on time (instead of stringing us along) knowing that failure to do so would not only further injure her credit, but mine as well (no, I didn’t tell her we would pay if she didn’t…she’s pulled enough guilt trips on me over the years, I think I was entitled to let her think she could mess up my credit).
I took that opportunity to (again) offer to help her get her finances under control, but she didn’t want that kind of help (I can only guess it was b/c she was afraid it would mean fessing up to doing a lot of things she knew were wrong).
Before I let her know our decision to cosign on a loan, I let her know how hard of a decision making a loan to her was, knowing that if I loaned her the money, I would be indirectly funding my sister’s drinking & drug habits. I did NOT want to do that, but I didn’t want to leave my mother high & dry at Christmas. I made my mother promise to NEVER ask me for money again. In fact, I asked her to never even HINT at needing money again b/c I don’t want to hear it. She promised, and I cosigned. She paid the loan the next month, and has never asked me for money again. Although her father ended up loaning her $20K to pay off her cc debt a couple of years later, which I only know about b/c they wanted tax advice for the “transaction(s)”. After it was set up, I wanted nothing more to do with it. I really HOPE she is sticking to the payment plan I set up for them. But I am severely disappointed in her for cosigning on a loan for a brand new car for my no-good sister earlier this year. There’s just no way I can stop her from ruining herself financially *sigh* All I can do is remind her every so often that I will not be supporting her when she’s old. I know it sounds cold to say that I will not support my own mother, but sheesh!
My wife’s family has a long history of not being good lenders/borrowers. Therefore my wife and I have decided we will not loan money, period. And we will only give if it is to keep food on the table (I would say shelter, but my in-laws live in a house that is well beyond their means) or a true emergency situation
Several years ago, before I came into the family, my in-laws laws lent about $3,000 to a first cousin, that lived a few homes down the street. The cousin had no intention to repay, and the in-laws clearly stepped over the boundaries in some regards. The cousin lost the house, and they have not spoken in over 15 years. Over the last couple years, the economy has gotten the best (worst) of my in-laws, and they are the ones that are asking family members for money. They have borrowed over $25,000 from his father, with no intention of repaying. This has caused a rift among my father in law and his two brothers.
“Can you give the money without holding a grudge?”
That’s the sticking point for me. I argue with myself constantly about loaning a small amount to my brother to wipe out his credit card debt, even though he has never asked. I want to help, but I think I would be resentful if I saw him spending “my” money in a non essential way, and that wouldn’t be fair of me. It’s probably better to let him dig himself out even if it takes a little longer.
If there was ever a true emergency, I would be able to help and have no regrets.