The 3 Golden Rules of Lending Money to Friends and Family

Conventional wisdom holds that you should never lend 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 be able to avoid financial entanglements that strain relationships.

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.”

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

The most important thing is to formulate a policy now. Then 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

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. For example, you could decline to chip in on a car payment or credit-card bill. Instead, propose help in setting up a budget, or paying for a few sessions of therapy for a compulsive shopping problem.

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

If you do decide to lend to someone, 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 a variety of sources, such as Rocket Lawyer.

You could even get the documents 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 were to die before the loan is repaid: Will it be forgiven, owed to your estate or subtracted from that person’s share of any inheritance?

If this involves a significant amount of money, instead of just spotting a pal $50 until payday, protect yourself by talking to a lawyer. Perhaps you could require 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 lend money to friends or family? Share your experiences in comments below or on our Facebook page.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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