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.

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  • Al Seaver

    Or you could do what I did when I was in the service and guys wanted to borrow money. Get collateral. I used to get their portable radios as collateral until they paid me back. Today you could hold their smart phone, laptop, tablet, or gaming system, Just make sure it’s worth more than the amount you’re loaning them so you can sell their stuff and recoup your money if they stiff you.

    • speaksthetruth

      that is genius

  • Elj

    This is a good read.

  • donnafreedman

    I did mention “getting something to secure the loan,” i.e., collateral. Guess I should have been more specific.

  • MrsNCLB

    its really quite an unfortunate thing…. i do believe that our expectations of others is often too high…. but i still believe that you should do on to others as you would want done to you….. i have this issue and have suffered for a long time with it… it has taken me years to slow down and at least have hours for the bank lol the joke in the family was calling me the “bank” and it was so hurtful when i heard this…. i work so hard and just give it away instead of taking care of myself first… and truly, those people who ask are only thinking of themselves at that moment…. so why expect anything else? again, i am a milion times better at it now but it took a lot of pain and sufferring….. God said to be a good steward over our blessings…. so this is what i try to focus on now…. i dont expect the money back even though i will ask for it…. i forgive and don’t give if it will hurt me in any way… good luck to us all who want to help others

  • Lydia

    I have borrowed an excess amount from a dear friend. The lender and I agreed on a monthly plan, which I have paid accordingly. Just the other day, he verbally attacked me about wanting the rest of the money now. The amount left is more than my monthly check. He may had a hard day, he’s working on quitting drinking. So, the agreed monthly amount bill is due on the 28th. What shall I do, just give him the agreed amount or borrow from someone else who agreed to help (but wants higher monthly payments)? Thanks for any suggestion/advice. The loaned money was for bills (medical and credit cards).

    • speaksthetruth

      If you have this written on paper, give him the amount you agreed on. But also think of it this way, something might of come up on his side and he needs his money now. Respect that and try to give him that money but don’t rob petter to pay paul. You will never get out of debt that way.

    • Donna Freedman

      I agree: Give him the amount that’s on paper. If he threatens to take you to small claims court, tell him you’ll be there — with the signed agreement for the judge to view. (And if it were me, I’d make a copy of that agreement and put it someplace safe.)
      It’s too bad things had to go this way. Here’s my other suggestion: Once you’ve finished paying him off, keep making that payment — to yourself. In other words, have it automatically withdrawn from checking and moved to a savings account. Building an emergency fund is key to keeping you from landing in this predicament again.
      Good luck!

  • Michael Smiley Gawthrop

    As I’ve told family members (and been told in return), this isn’t a loan, this is a gift to help you, but keep it in mind the next time I need help. There are times I legitimately can’t help and there are times that others legitimately can’t help me… but believe me when I say the person who tries to help me is going to be the one I try to help in return.

  • speaksthetruth

    I don’t lend money. I don’t, I don’t, I don’t. Not to my friends, family, strangers, etc. I have seen it destroy relationships. I’m that girl who says “Sorry, I’m broke”

  • Tom

    Unless it is life or death (or an emergency very close) just say “no!” to any amount you’d not be willing to give the person as a gift.

  • NoCellPhones

    I’ve been burned too many times by my children who want a “loan” which they say they will pay back or say they will work off, but never do. This year I’ve started saying “no” and now they tell me what a terrible parent I am and bring to light all of the parenting mistakes I’ve made. I’m okay with that.–I’ve given them far too much monetary support for too long and it’s NOT done them any good.

  • Don1357

    Just a thought for reducing or halting multiple small loans: If you have people who always seem to want “a few dollars,” just keep track and the next time they ask, say, “As you know, you owe me $10 from last January, and I am ok with that, but I won’t lend you anymore until that is paid off.” It usually deters the habitual individual, because 1. There is no way he/she is going to pay back the $10 debt, and 2. Ten dollars is a small amount to pay to protect oneself from being nickel and dimed on into the future–usually becoming for larger and larger amounts as time passes. It isn’t kind to help a person become addicted to charity–regardless of how tough it is for you to say, “No.” “Teach the man to fish” if possible. If not let him be indebted but leaving you alone in the process!

    For bigger loans, ALWAYS be business-like in your dealings. If the person gets put out by your business-like approach; that enables you to stop the transaction before it is completed and you lose no $ and probably very little personal animosity is generated. It is when time passes and feelings get more and more raw that leads to long-term hostilities or other unpleasantness as the result of not dealing correctly right from the start.

    Many years ago, I had a wealthy relative I finally got up enough nerve to ask about a loan. My wife and I were young and had very little and needed desperately to get a home of our own and had no down payment. Her response was very kind, but she told me I would have to contact the fellow who handled all of her finances and she was sure he could work out all of the details. I didn’t pursue it any further but learned a great deal from this fine lady. She had enough money to buy our house for us (much less lend us a down payment), but she had learned the “don’t lend to relatives” lesson many years before and put another individual between her and family members–someone who had no trouble drawing up all of the papers or simply saying, “No” if it didn’t seem like a wise idea. I don’t have unlimited resources, and I am a relatively easy touch, so I have used this tact numerous times by sending them to my wife, who has the financial acumen I lack in dealing with others. She has no problems lending money in a professional and business-like manner and requiring all of the legal steps to do this. She keeps up with fair interest to be charged, amortization schedules, time limits and penalties for late payments, etc. And it is all put in writing, notarized and a lawyer is usually involved if it seems best. I am sure each reader has somebody in his/her family who can handle such requests so that all benefit and nobody gets burned.

    Be careful of “great stock options, penny stocks or business deals that appear to be solid–especially if you are not an expert in the field in question–” that a friend or relative poses to you. They can easily turn out like any other “bad loan.” In our younger years, my wife and I were approached by a good friend who had a guaranteed business opportunity. He was dependable and serious and seemed to know what he was talking about, but it would have required that we take $5,000 out of a savings account we needed for the future. But, he guaranteed we would make 5 to 10 times the amount back. I didn’t feel we could take the chance, and doing this up front left no bad results, but it never went anywhere. The building that was to be the BBQ place never was finished being built, and nobody but the scam artist got the money from my friend and his friends, but not from us.

    A number of years ago, we “invested” $10,000 in a “really good idea that couldn’t go wrong and we would be on the cutting edge of earning some REAL money in the future.” We loaned it to him because we cared for them and their kids and went into it with our eyes open. They were struggling with getting investors at the time and we had the additional funds available to us. Well, it didn’t pan out that way and over 20 years have passed without getting any benefits–not even any of our initial investment–back. We still love this couple of relatives and do things together. We trusted his judgment and “saw the opportunity,” but we were not savvy in this area. Who knows, we still may see the benefits! Right! Probably not. For small or large amounts, always be wise, business-like and be willing to lose money–but not more than you can afford at the time.

    Lastly: Money isn’t your life, your worth or your future. It just might seem that way. I just watched the video “Burt’s Buzz” on Netflix and felt better about my last fiasco with the $10,000. Burt lives in a humble little place on a few acres of land that was left to him after his “true love” sold his business for $960,000,000 (yes “million”) and left him basically out of the picture. His sentiments = “I have all that I need right where I am. Why wish for more?

  • Goodchem3208

    Have the debtor fill out and sign a post-dated check, or a series of post-dated checks if the debt is to be repaid in installments. Dates on the checks should be for the dates on which the payments are due. This leaves it up to the debtor to make sure the money is available in the checking account or face fraud charges. Just be sure that you are willing to take a relative or friend to court.

  • Tom

    One IRONCLAD rule – Don’t lend any more than you’d gift the person.

  • doug Kar

    Rule #1 – Don’t lend money to family/friends
    Rule #2 – Don’t lend money to family/friends
    Rule #3 – Don’t lend money to family/friends

    Unless of course you don’t want them to be your friends or part of your family.

  • SherrieL

    If you loan a hundred dollars to your in-law and they never speak to you again, it could be worth it (joke).

    • Michael Smiley Gawthrop

      Sadly I tried that with my sister-in-law, she repaid it and now talks to me more than before.

  • KirkE50

    I have loaned money to family members numerous times by having them borrow my money as a secured loan through my credit union. The credit union makes reminders, if necessary, and it’s a completely legal loan that they understand must be repaid. It’s worked very well for me without any problems.

  • Lorilu

    It depends on who needs it, and why. Mom or Dad or brother or sister or kids because it’s something like it’s winter and the furnace is broken, that sort of thing.. And be prepared to lose the money. I have lent and been promptly repaid. But if you’re not, then you don’t lend the next time. Let them get it from a credit card.

  • fmh4000

    I’m in my mid-50’s and hold an MBA in Finance and understand that the article is the conventional wisdom from the financial world. I don’t fully agree though. There are ways to enrich yourself financially and ensure you retain it, but I believe that enriching your life with and through your family and friends is just as important.

    During my life, I’ve been there to help my family and friends when they’ve needed it and they’ve reciprocated at one time or another. I realize not everyone has family and friends like this and I find that a bit sad and unfortunate, but that’s what my family and friends do. We’re all reasonably responsible people that at one time or another have had something difficult/catastrophic happen–that’s life. However, we’ve all chosen to provide support to one another, repaid each other when we could, and appreciated each other’s kindnesses. There is a history with people you’ve known for much of or your whole life–especially those you love and care about and vice versa.

    I find many of the comments to be hard, self-centered, short-sighted, and a bit cynical and jaded to be perfectly honest. They assume the worst–that their family/friends will not repay or be responsible when it comes to a loan. No man/woman is an island, and I hope that if/when something happens in your lives, you’re able to depend upon someone to help you get back on track–no one’s ever successful on their own. They do it with the help of bosses, family, friends, neighbors, customers, clients, the government, etc. This is how breaks are made. And nobody goes through life without encountering some hardships at one time or another.

    And please don’t bite my head off about specific circumstances that you might have run into about losing money you loaned to family/friends. I’m not saying to be imprudent about how or if you lend at all. We’re all adults here. By all means, don’t lend if you don’t have it. Weigh the pros and cons regarding someone that has a track record that is suspect. Sure–do a promissory note if you must. Sit down and figure out a payment plan that works for both of you with or without one. Do a secured note through a bank if you must to be comfortable–to each his or her own.

    However, there’s more to life than just making sure that you don’t “lose money” from loans to people in your life though–for me personally, there’s a responsibility between me and my family/friends/neighbors that’s more important to all of us. This may not be a popular notion for many people in the financial world, but it comes from personal experiences through up and down times. And I am definitely not an old fashioned person when it comes to these things. I remember thinking and espousing the conventional wisdom at the beginning of my career. However, time has provided me an expanded perspective and I’ve adjusted accordingly.

    For what it’s worth, my recommendation is to consider each request individually with proper due diligence if it’s someone in your life. Discard the hard and fast, unequivocal rules not to lend to these people. Life over a person’s whole lifetime is just never that simple.

    • disqus_3BrONUAJno

      This sounds a lot like Warren Buffett’s frequent comments about how little he pays in taxes, while not mentioning any charitable activities he is involved in. The vast majority of donations to charities come from those of lesser means.
      Dave Ramsey isn’t the brightest light in financial matters, IMO, but this quote from him is the best final word this article offers, “If you have the money to help then give it, don’t loan it.”

    • Deb

      I do agree with all you have said, and I emphasize one point in your response:
      “During my life, I’ve been there to help my family and friends when
      they’ve needed it and they’ve reciprocated at one time or another.”
      If the borrowers are unable to pay you back or to ever reciprocate by doing a favor for you, then you would hope they would be grateful. At least and you will feel your generosity was appreciated. If however, the borrowers show you over time that they are not grateful because they feel entitled to your generosity, it feels very different.
      I considered myself a very generous person until I saw that side of human nature. I gave family members thousands of dollars and declined to make them pay me back, considering it a gift.
      Not only did the recipients refuse to do me a favor later, they reacted with disgust, cursing me and threatening me, while demanding to be paid for their time,
      You are fortunate to be among good people, and I hope all goes well for you. I hope I will overcome the past and will not be as jaded about people seeking help and judge each situation on its own.

  • Joe Cipriani

    If they are creditworthy, they can borrow the money from the bank. If they have stiffed their creditors before and are not creditworthy, what makes you think they won’t stiff you, too.

    • disqus_3BrONUAJno

      This is why payday lenders are the fastest growing segment in the financial services industry.

  • disqus_3BrONUAJno

    I used to have a fellow employee who would borrow $20 the first of the week and repay it at the end of the week. He has moved onto another job, but there were three reasons why I didn’t lend him the money the last time he asked before he left.
    1. I didn’t have it in my pocket.
    2. He advised me that he wouldn’t be around at the end of the week, and so, unable to pay me back.
    3. He needed (wanted) the money to buy a movie.

  • Andreamsm

    A very dear friend of mine once asked me and my husband to lend her sister (whom we’d never met) $5,000.00. My friend had painted a very irresponsible picture of her sister over the years, and so we politely refused to lend her the money because we knew we’d never get it back. It took a while, but fast forward three years, and my friend and I are no longer in contact. Sad.

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