Should You Ever Loan Money to Friends and Family?

Should you loan money to friends or family

Jason Hull is a personal finance aficionado, a candidate for the CFP(R) Board’s certification, a Series 65 securities license holder, and owner of Hull Financial Planning.

“Friendship and money: oil and water.”

–Mario Puzo

All of us know deep down inside that money is a touchy subject when it comes to friends and family, particularly when one owes money to the other. Yet, when we feel like times are tough, we turn first to friends and family to lend us the money to tide us over until we can turn them around. Or, alternatively, someone has come to us looking to borrow money to get out of a pinch.


No one wants to feel like an ATM

Almost invariably, despite the best intentions of both sides, the loan winds up being a sticking spot between the parties involved, and oftentimes, the end result is nasty.

A recent study by Carnegie Mellon University documented the trials and tribulations of borrowing amongst friends and family. Unsurprisingly, the results were not positive. Borrowers tended to overestimate their ability to pay and mentally recharacterized loans as gifts rather than loans. When they were delinquent, borrowers avoided the lenders, but surprisingly they didn’t think that the lenders were upset by the delinquent behavior.

Why People Lend to Friends and Family

Despite our inner voice, which screams “NOOOOOO!!!!!!!” at the thought of lending money to friends and family, we do it anyway. Why?

  • Nobody wants to be perceived as the “bad guy” in a close relationship. You want to enable your friends and family to succeed, so you think that saying “no” is going to harm the relationship.
  • We think that we could borrow from them if the tables were turned. Because we mentally place ourselves in the opposite situation and imagine what the other side would do, we immediately place ourselves in a position of feeling like we should return the favor. Humans are very impacted by the need for reciprocity – scratch my back and I’ll scratch yours. In this case, we’re imagining the need for reciprocity and allowing our Monkey Brains to tell us that we need to return the favor.
  • We think that we’re truly helping out the other person by loaning the money. Because they are friends and family, we think that we know them, that they’re generally responsible, and that this must be an exception rather than the rule. We don’t imagine that we’re giving the addict another drink.

How to Approach Giving a Loan to a Friend or Family Member

There are better ways to think about the dicey situation when money, friends, and family don’t mix.

  • Give the money as a gift. That way, there are no expectations about whether or not the recipient is going to pay the money back. It allows the recipient to feel like he or she can remain close to the giver and not have to answer uncomfortable questions about when the money will go the other way. However, if you do this, then truly mean it. Once the check is written or the cash handed over, it’s out of your life forever.
  • Tie the gift to a change in behavior. Something has happened which requires the money, and that’s the root of the problem. Is it budgeting? Is it needing to get a second (or first) job? Whatever it is, the money doesn’t get paid until steps to change the behavior take place.
  • If it’s a loan, document the terms and conditions. If it’s a small loan, then you probably only need a written statement of interest, repayment terms, amount, and parties signed by both parties, but if it’s going to be a significant amount of money, then you probably want to get something more formal drawn up and recorded somewhere, to include repercussions if the loan is not repaid.
  • Don’t forget about taxes. There may be tax implications to this exchange, either gift taxes or imputed income, so make sure you account for those too.

At the root of the discussion is a decision of whether the money or the relationship is more important to you. It’s also probably worth evaluating if the person asking for the money simply sees you as an ATM or is someone who is truly in need. Regardless, once you open that door, don’t be surprised if it opens again and again, and be prepared to deal with that if it does happen.

My personal advice is to stay away. Money issues change relationships, so keep money out of the discussion. As the Beatles said, you can’t buy me love.

Have you ever loaned money to a friend or family member? If so, how did it work out? Tell us in the comments below!

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  • I have “loaned” money to friend and family before without having the bad consequences. Each and every time, I treated it just as a loan from the bank. There were terms and conditions along with a repayment program. I even charged interest on late payments. This worked for me, but I wouldn’t recommend it for everyone.

    • Glad to hear you have avoided unpleasant experiences with this! Were your “borrowers” particularly responsible or do you think setting the terms ahead of time made the difference?

      • I had some responsible ones and other that were not. I think setting the terms helped. Even though the loans were interest free, they knew that I would charge interest on late payments. That kept them on schedule. I would be flexible, but never had anyone not pay me back.

        • You definitely have to document if you want to be able to nudge them into the behavior that you want. The person who borrowed the money should be careful, though, as there may be imputed interest income which is taxable.

  • Jan

    We gift money to our kids (30&28) if they need it. We once lent money-but felt uncomfortable asking for it back. We decided after that experience that if we had the money we would gift and expect nothing in return. It seems to be working out fine.

    My mom (80) loaned a lot of money to my very successful nephew. He then developed a heart condition and will have to sell the house. She is now in the process of gifting the large sum to him year over year and will forgive the debt when she dies.

    • That is a good way to go! It seems that it has helped to preserve good feelings within those relationships too. Of course, it requires that you really let go of the money and not expect to get it back.

      • That’s the big thing. If you can’t let go of the money, then it’s still a loan in your mind, regardless of what you’ve said. Attitude is key.

  • John S @ Frugal Rules

    I have loaned a few times in the past and it never really worked out well. I think that adding money into the mix can really ruin a good thing. If I have a friend/family member in need I just like to give the money as a gift and expect nothing in return.

    • I tend to agree, John. There are a lot of things that can go wrong and can mess up the relationship if the loan is expected to be paid back.

    • Even if the loan is paid back, it alters the relationship, superior/inferior. Plus, there’s all sorts of reciprocity going on. Just not a good thing. I think you’ve learned the lesson well.

  • Chris @ Stumble Forward

    I once lent my brother $5000 to cover some bills and it caused a lot of hardship between us. He did pay it back over 3 years later but I didn’t like to harp on him about it mainly because he had cancer. It was a tough situation but I’d do it again because I knew he would have done the same for me.

    • Wow, that’s a very difficult situation. I can only imagine how hard it must have been. But I’m glad that it turned out well and that he paid you back.

    • Chris–If you don’t mind me asking, why did you lend it as opposed to give it?

  • I would (and have), but would do so only if I’m comfortable with never being paid back

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