Should I lend money to friends and family?
It can be hard to refuse to loan money to a close friend or family member. You may even feel obligated to lend a financial hand to your loved ones simply because they’re important to you and you don’t want to see them struggle.
But lending money to loved ones comes with considerable risk — not just in terms of getting your money back, but also when it comes to the relationship you have with the person in question.
Enabling poor spending habits and causing awkward conversations are just two of the many reasons providing loans to loved ones is a bad idea.
Why You Shouldn’t Offer Loans to Friends or Family Members
Lending money to family and friends often comes with more problems than it solves, both for you and the person you loan money to. The consequences of a bad loan to a loved one range from difficult to dire. For these reasons, sometimes, it’s best to say no.
1. They’re Open-Ended
Unless you agree to a structured repayment plan, most personal loans between friends and family members are open-ended. That means neither party knows when payments are due, how much they should be, and whether the borrower must pay any interest.
Open-ended loans don’t outline the expectations or obligations of either the borrower or the lender, leaving you both to make your own assumptions about the loan and how to handle it in the future.
If you choose to lend money to a loved one, outline your expectations before handing over any cash. Communicate about repayment terms like due dates, amounts, and whether you will charge interest. Even better, create and sign a loan agreement to document the terms of the loan in writing.
2. Repayment Isn’t Always a Priority
Friends and family members know you love them, so repayment isn’t typically a priority. The money isn’t coming from a financial institution, and there aren’t any immediate consequences for late payments, such as late fees, high interest charges, or a negative credit score. Sometimes, borrowers feel less obligated to repay the loan promptly. They may prioritize an unnecessary purchase over paying you back, assuming you’ll understand.
If you can’t rely on the borrower to make payments, it becomes your responsibility to follow up and ask for the money back, which can be difficult without straining your relationship. Emotions can take over and cloud your judgment, making you more likely to accept excuses and half-promises.
You don’t want your loved one to feel angry, guilty, or ashamed, which can make bringing up repayment difficult, especially if it becomes an emotionally charged conversation that leaves you both upset and unsatisfied.
If you’ve already loaned money to someone you care about and aren’t sure how to ask for repayment, approach the topic carefully.
Avoid broaching the subject at gatherings with other friends or family members who aren’t involved, which can only make things uncomfortable for everyone in attendance. Instead, choose a neutral setting and have a one-on-one conversation. Be polite and straightforward, keeping your emotions in check.
Then make a plan together. Although they may not be able to pay the entire amount in full, you can at least agree to a structured repayment plan that works for both parties.
3. It Could Damage Your Relationship
There are so many ways a loan can go wrong. And unfortunately, they can affect how your relationship plays out long term. If your interactions sour because of issues related to a loan, it may be hard to repair any damage.
And if the borrower is ultimately unable to repay you, money often becomes part of every interaction you have, taking away from the relationship you’ve built and causing hard feelings.
The tension between you and the borrower may lead to anger, guilt, shame, and remorse. All of that can permanently damage your relationship, whether or not they eventually pay off the loan.
If you’ve already lent money to a loved one, discuss potential issues before things go south. For example, talk about:
- The loan terms
- What you will do to avoid potential relationship issues
- What each of your expectations and obligations are
- How you will handle any problems that arise
- The risks associated with lending money to loved ones
4. It Can Make It Awkward for Family and Friends
If you and the borrower get to a point that the loan affects your relationship, it will be noticeably awkward for everyone around you. Disagreements can lead to drama, and your mutual acquaintances may feel obligated to choose sides.
It could also mean you speak and interact with each other less or avoid attending the same events altogether. That can affect your friends or family members, who may feel they have to make special arrangements for events to work around your feud.
If you’ve already reached the point that a loan you made to a loved one is affecting your relationship, go out of your way to keep one or both of you from being disinvited to group events. Steer all conversations away from money and choose the right time and place to discuss your personal issues.
5. The Borrower May Feel Obligated to the Lender
When people borrow money from a bank or financial institution, they feel obligated to repay the loan, but it’s purely financial. When they borrow money from a loved one, they often feel a moral and emotional obligation to that person because the lender helped them out of a tight spot.
Sometimes, people unintentionally (or even intentionally) manipulate friends or family members they loan money to when the borrower can’t pay them back.
For example, they may attempt to control a borrower’s spending or expect them to take on extra tasks and responsibilities until they’ve repaid the debt. In these situations, it’s hard for a borrower to refuse, putting them in a difficult position.
If you lend money to a friend or family member, be conscious of the moral obligation they feel to you, and don’t take advantage of their situation. Although they may owe you money, you don’t have a right to expect them to do whatever you ask.
6. The Borrower May Ask for More
If you agree to lend money to a loved one once, you can do it again. At least, that’s how a borrower may feel.
An initial loan to help with a debt or purchase may not seem like a big deal. But just as a lender can take advantage of a borrower, a borrower can take advantage of a lender.
If a borrower knows you have money you’re willing to share, there’s a chance they may attempt to use you as a personal bank account. You become a safety net to fall back on when they run into issues with their finances. And it means their debt to you is constantly increasing, just as your savings account is decreasing.
If a borrower requests an additional loan, it’s best to refuse (politely). Offer to help them in other ways, like developing a personal budget or coming up with alternative options for whatever they wanted to use the loan toward. For example, suggest a public transit pass in lieu of a new vehicle.
7. It Enables the Borrower’s Bad Financial Habits
If a borrower knows they can run to you for financial support every time they run into budgeting dilemmas, it gives them an easy way out of dealing with their financial issues.
That isn’t conducive to understanding financial responsibility and effective money management. Instead, it sets them up for even more potential pitfalls in the future.
When a loved one asks you for a loan to pay off a debt or make a purchase, try to determine the real issue.
For example, could mapping out a monthly budget enable them to pay their own bills? If so, instead of handing over cash, help them plan their monthly spending and teach them how to become more financially independent.
That helps them long term as opposed to giving them money, which will likely end up as a Band-Aid solution to poor spending habits or lack of budgeting.
8. They Don’t Earn Interest
Unlike bank-issued personal loans, personal loans between friends don’t usually accrue interest charges over time. That means they have less motivation to pay you back.
If you’d put the amount you loaned to your friend or family member in a high-yield savings account, you would have earned interest from the bank. And while the amount may have been meager, it still would have been something.
If you lend money to a loved one, include an interest rate in your agreement. It will motivate the borrower to pay and get you a small return on your loan.
9. You Might Need the Money
Without a repayment plan or due date for the loan to be paid in full, it’s hard to say if or when you’ll get it back. But what if you need to choose between making a mortgage payment or buying groceries?
If you’ve loaned your entire emergency fund to someone else, you won’t have money to fall back on when times get tough in your own household.
It’s imperative you consider your own financial situation if you have a tight budget or limited savings since that could leave you in an even more vulnerable position if unforeseen circumstances arise.
10. It’s High-Risk
If a bank refused your loved one a loan, it means the financial institution they approached deemed them too high-risk to lend money to.
That could be because they have a high debt-to-income ratio, a poor credit score, no collateral, or limited assets. And if the borrower is unlikely to pay back a loan from a bank, what makes you think they can repay you?
When lending money to a family member or friend, it’s vital you understand you may never get it back. With little to no accountability in the form of late fees or the threat of a lower credit score, motivation to repay the debt is often low.
You don’t have the same resources or collection tactics a bank does. There are ways to get repaid when a loved one owes you money, but some of them are likely to end the friendship.
If you’ve loaned money to a loved one and there’s no longer any hope for repayment, you need to decide how to move forward. If you choose not to pursue it, do your best to move on and repair any relationship damage.
If you want or need your money back, you can attempt to collect on the debt in small-claims court if it qualifies, but there’s no guarantee a judge will side with you, especially if you don’t have a written agreement or evidence of collection attempts.
11. It Could Damage Your Credit
If you’re unable to provide a loved one with a loan, they may ask you to be a co-signer on a bank loan. At first, it can seem like a win-win. You don’t have to part with your money, and your friend or family member gets the cash they need.
But it isn’t as simple as that. Co-signing a loan means you’re just as responsible for the debt as the other party. If they miss a payment, the bank expects you to pay the amount due instead.
And the longer a payment is in arrears, the more likely it is to affect your credit rating negatively.
Unfortunately, if you’ve already co-signed for a loan, you’re legally bound to the debt. The only ways you can completely remove yourself as a co-signer is if the borrower refinances the loan or the loan has a co-signer release clause that allows the borrower to remove you after a certain number of on-time payments.
12. It’s Based on Emotion, Not Logic
Lending money to someone you care about isn’t based on logic. Your emotional ties to that person and whether you feel obligated to help or support them heavily influence the decision.
Unfortunately, that means you’re more likely to brush aside red flags like consistently poor spending habits and financial irresponsibility. And you’re more likely to agree even when it goes against your better judgment.
For example, if a sibling asked you for a loan, would you give it to them because you know they’ll pay you back or because you feel like you have to?
Providing cash to someone you care about feels like an act of love, but it can quickly sour your relationship. Lack of repayment, emotional manipulation, and depleted funds are risks you take when you lend to a friend or family member in need.
To avoid the financial, social, and emotional tolls associated with lending money to a loved one, it’s best to keep your cash to yourself unless you’re offering it as a gift. Steer clear of awkward interactions and animosity by keeping your friends and family members separate from your finances.