The 3 Golden Rules of Lending to Friends and Family

Getting together with family during the holidays? Here’s what to say when one of your relatives hits you up for a loan.

Conventional wisdom holds that you should never loan more than you can afford to lose. Believe it.

If your brother or your BFF asks for $500 for car repairs, you have no guarantee you’ll ever see those funds again.

Here are the three “golden rules” of lending money to friends and family. Follow them, and you should stay out of financial trouble during the holidays and into 2016:

Rule No. 1: Make a policy of saying ‘no’

Have trouble saying “no”? Try it a different way:

  • “That’s not in my budget. Sorry.”
  • “I have a strict anti-lending rule: I’ve lost too many relationships this way.”
  • “I paid for your last car repair and you haven’t returned the money. I can’t do it again. Sorry.”
  • “Let me look at my budget and see what’s possible. I’ll let you know by the end of the day tomorrow.” (This is for when you’re blindsided and/or it’s a very emotional situation. Go home and send a “that’s not in my budget, sorry” email.)

If the would-be borrower continues to plead with or badger you, remember that you cannot wreck your finances to prop up someone else. It’s really OK to reply, “I’m not in a position to help you and I won’t discuss it further. Sorry.” Be prepared to hang up the phone or walk out of the room.

Should the person bring it up again the next time you meet, firmly state that “if you keep talking about borrowing money, this conversation will be over.”

The most important thing is to formulate a policy now, so you won’t have to think on your feet when the situation arises. Maybe you only lend in dire emergencies, or to relatives with jobs. Or perhaps you decide not to lend to anyone under any circumstances.

The important thing is to decide on a policy, memorize it, practice saying it and stick to it — no exceptions. Your response should be immediate and firm.

Rule No. 2: Try to help in other ways

Financial guru Dave Ramsey doesn’t think you should ever lend money, especially to family members. “It ruins relationships,” he says. “If you have the money to help then give it, don’t loan it.”

Don’t make a habit of it, though. If your cousin or your frat buddy needs help on a regular basis, those cash infusions address the symptom rather than the disease. Whether it’s careless spending or a lifestyle that’s too big for its britches, the underlying issue needs to be fixed, not enabled.

Offer help instead of a bailout, suggests wealth psychology expert Kathleen Burns Kingsbury. For example, you could decline to chip in on an auto payment or credit-card bill and instead propose help in setting up a budget, or paying for a few sessions of therapy for a compulsive shopping problem.

Kingsbury says:

“It may be that you can negotiate something where you’re helping, really helping, instead of supporting unhealthy behaviors.”

Rule No. 3: If you must lend, be smart 

If you do decide to lend, get it in writing — even if it’s your mom, or the parents of your godchild.

You can get a free promissory note form online from Suze Orman. Gail Cunningham of the National Foundation for Credit Counseling suggests getting the documents witnessed and notarized. This shows the borrower that you’re serious about being repaid. It also protects you later on if things get ugly — for example, if that former BFF stands in front of a judge and says, “It’s not my signature.”

Be specific about repayment terms. “As soon as possible” is vague enough to be interpreted as “any time from next week to never.” Spell out what happens if you are to die before the loan is repaid: Will it be forgiven, owed to the estate or — if the borrower is a close relative — subtracted from that person’s share of any inheritance?

You might also consider putting this phrase into the document: “If you don’t repay me via the terms on which we agreed, you will never again be allowed to ask me for money.”

If this is a major amount of money versus spotting a pal $50 until payday, protect yourself by talking to a lawyer and, possibly, requiring something to secure the loan.

Again, you shouldn’t lend money you aren’t willing to lose. Promissory paperwork notwithstanding, are you really prepared to take a sibling or a friend to court?

Do you ever loan money to friends or family? Sound off in our Forums. It’s the place where you can speak your mind, explore topics in-depth, and post questions and get answers.

Stacy Johnson

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  • Theresa

    Over the years I’ve loaned/given large amounts to friends and family. Usually the family members don’t repay. I reduced it to giving $25-$50. Then I got soft again and gave more and didn’t get repaid. However, I did use to feel that if I’m in a position to give I will. Since Oct 2014, I am also on a mission to pay off my debt so I have cut back on spending and have been sticking to a budget which makes loaning/giving money more difficult because that would be my misc spending money for the week/month. Makes my life much easier. And once you tell people your maximum to loan is $25-$50 they stop asking. Love it!

    • Adrian

      I was once asked for money and when I said I would only give $50 or $100 bucks they turned away. Later I realized they never did specify what that money was going to be for.

  • As Sir Philip Gibbs said, “It is better to give than to lend, and it costs about the same.”

  • Efraim Kristal

    Last year I lent a friend $60,000, and thought I was being smart getting him to sign a promissory note, having this notarized. He paid late at first, but then stopped making the repayments altogether. After six months without paying, despite monthly reminders and despite living it big with his new girlfriend, he finally got angry with ME for bothering him and threatened to declare bankruptcy. Our friendship was ruined.

    Today I spoke with an attorney. She told me that because the loan is unsecured, even if I paid the $1200 to “default him,” it would be money down the drain since my prior-friend would likely declare bankruptcy and I’d see nothing. I also cannot report to credit bureaus because I am not a business. And the loan amount is too great for me to sue the individual in small claims court. All I can do is wait and hope his fledgling business becomes profitable in a few years and then try to sue him.

    Lesson learned. Unless someone has something valuable that can be used as collateral, I will never again lend money. Even if it is a matter of life or death.

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