How to Lend Money to Friends (Without Ruining the Relationship)
Published on - January 26th, 2011 (by April Dykman) This post is from staff writer April Dykman.
Lending money to friends and family is a generous act — one that could easily backfire and even ruin your relationship. Most of the time when someone is considering a loan to a family member, I think, “Don’t do it.” There can be other ways to help. But when it’s someone you care about, logic only plays one role in the decision-making process.
Not too long ago I was in this situation. (I want to share it, but obviously I also want to be sensitive about revealing personal information, so I’m changing names and other minor details.)
I’ve been friends with Megan for almost 10 years. In that time, she’s never had much money, but she also never asked for so much as $5. Last year, she and her boyfriend rented an apartment. A month later, he lost his job, and she had to go on medical leave. He couldn’t find another job, and she had tried to return to work but her doctor wouldn’t sign the medical release (it was still too early). To complicate things, they had a child. I knew my friend, and I knew she was only asking for help because of her child. They were behind on rent, and although she had just started back at work, she wouldn’t see a paycheck for another two weeks.
I don’t believe in loaning money most of the time. It’s not that I don’t want to help make things better, I just think that in most situations it’s a temporary fix. If someone can’t make a house payment this month, what’s going to change next month? In many cases, money troubles are a sign of ongoing issues and habits. Also, it can strain your relationship. If your brother owes you $1,000, and he buys a Harley motorcycle, you can’t help but wonder where he came up with the cash when he hasn’t even paid you back. Then things get icky.
The right way to lend money to friends
I ended up giving my friend the money. I felt that this was a situation where she just plain fell on some hard times. The job situation couldn’t have been predicted. They thought they had two incomes to cover a very modest apartment. There wasn’t a sufficient emergency fund to cover situations like this. She was unable to work, and now that she could, she had to wait for a paycheck.
But I was careful about how I did it, both to protect my interests and our friendship.
Here’s what I did:
- I talked it over with my husband. He and I had a conversation before I gave my friend an answer. Talking it over with my spouse was good to know we were on the same page.
- I expected to not be repaid, and only loaned as much as I was willing to lose. My husband and I agreed that we would view the money as a gift, not a loan. If she paid us back, fine. If not, fine. I made it clear that we weren’t expecting repayment.
- I helped find a solution to the situation. If possible (and only if they’re okay with it), help your friend in other ways. In my case, I knew someone who could give my friend’s boyfriend a job.
I’ve read several articles that advise drawing up a contract when lending money to friends or family. While it seems like a good idea, what will you really be able (and willing) to do to enforce it? If your friend or relative doesn’t feel a responsibility to pay you back, a piece of paper isn’t likely to change that.
Not always a happy ending
Unfortunately, my friend continued to have money problems, and eventually she was evicted. Her boyfriend was fired from the job after a few weeks. While I feel for her, that’s the extent of how much I can help her — at least financially. I don’t regret our decision to help out, and though the money is gone, our friendship has remained intact, which was my primary concern when she asked for help.
Have you loaned money to family or friends? How did you do it? What went right? What went wrong? Do you have any advice for others in this situation? (Or, if you’ve borrowed money from friends or family, what can you tell us from that side of the fence?)
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April, you are exactly right with #2. Always think of it as a gift instead of a loan.
But then you need to put it out of your mind. You have to force yourself to never think again about lending that money. Because if you do, you’ll find yourself second guessing the decision or judging your friend’s choices which can still poison the friendship.
And if you don’t think you can do that, you might want to reconsider making a gift/loan at all. Perhaps you’d be better off providing help “in kind” like doing childcare while your friend looks for work, preparing their taxes, or helping them to sell items on Ebay to tide them over.
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A great topic, and a very sensitive one too. A few years ago my mother asked me for a loan of $9,000 to help her out of a financial jam. I gave it to her as a gift, not a loan. Then I neatly shunted her out of my life, and we have had no contact since then. You see, she is one of the most fiscally irresponsible people you can imagine. Her whole adult life has been one financial (and personal) mess after another. Some people are like that, and they never learn from their mistakes as long as their friends or family continue to bail them out.
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My parents have helped other members of the family out quite a lot. In each case, they make it clear that the “loan” is interest-free and for as long as it’s needed. They view it themselves as a gift. AFAIK, many of the loans have been paid back in part or full, and if anything, it has strengthened family ties.
Gifts to help someone out can pay back in unexpected ways. When I inherited a car I didn’t want, and couldn’t afford to keep, I gave it to my grandfather, whose car was starting to need more maintainance than he could cope with. He then gave that car to one of my aunts, who can’t afford to buy one. We all feel like we got a good deal, and it’s started a tradition that people in the family with older cars to sell either give them, or sell at a reduced price, to those who couldn’t otherwise afford to buy them.
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This is a tough topic. You might consider your loan a gift, but it might be something that’s always hanging over the head of your friend, because she really wants to pay you back.
Maybe setting up an alternative would be a good solution. If she can’t pay, then maybe she can help you in the garden, or her husband can assist in the remodel of your house. You won’t see your money, but this way, you might still keep your friends.
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I have one person in my life who *constantly* asks me for money. My response is always the same–I offer the amount I would spend to take that person out for dinner. Anything more than that, and I would be angry and mad at them which would affect my relationship. (The cycle of asking me for large amounts of money is starting to affect it as well, but I have no control over that side of it.). This person has gotten at least five major ($1000+) loans from other people and has never paid back more than $100-200 to anyone.
I have another person in my life who has spent their adult life being incredibly frugal. They scrimped, saved, and never indulged themselves ever. Even so, they had a string of bad luck that stretched them to the breaking point. I knew when they asked me, it was a true emergency, so I gave them $500 as a gift, not a loan. I made it clear that there was no pressure to repay it. I also gave them an old beater car I was getting rid of. The car served them for about 3 years and the $ tided them over until their luck changed. Even though I made it clear I had no expectations, they have looked for opportunities to repay me in other ways, such as helping us out when we moved.
I have a third friend who is essentially broke. This friend is highly responsible with money but just doesn’t have much. I often cover the costs for this friend to participate, but I make it clear to them that I am doing it for selfish reasons–I want them to be there so that *I* am happier–rather than out of a sense of charity. Bc I am honest about why I help this friend out, and bc my friend is not the type of person who expects or demands charity, there is no awkwardness or unreasonable expectations. This arrangement would not work if I acted as though my friend owed me all the time for unrequested largess or if my friend approached situations presuming I would pay.
Lending money to friends is a surefire way to screwup friendships. Giving money can work, but only in certain situations. I would never give the first person a large amount bc I would then be overly irritated by their poor habits. The second & third people are different, in that both work their butts off not to be dependent on other people. I would not regret helping either of them out for any reason.
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I had a friend who did a similar thing for me when I was almost a year into unemployment and my car was towed from my parking lot(I had 4 unpaid parking tickets, and the city could see my license plate from the street so I was fair game.) I don’t think she even checked with her husband, but they both had great jobs and $500 wasn’t as huge a deal to them as it was to me. She even came to get me with her daughter in the back seat, went to the parking referee to pay the tickets, then to the tow company to get my car.
5 years later I’m in a much different place, and I JUST wrote her an email saying thank you again, how much her actions meant to me at the time, and also telling her of my intention to pay if forward. She made it clear upfront then that this was a gift, and reiterated that when she replied now.
I now have money in emergency savings(and pay my parking tickets IMMEDIATELY) and am on the lookout for an opportunity to help someone else in the same way. If you can afford to help someone in this way, it can be a life changing event!
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All of the times I have loaned money ($50-$350 so far), I expected to see nothing back as you suggested. I have been very lucky that all of my friends (and the two coworkers) were able to pay me back eventually. It usually takes a few weeks but once it took 2 years, lol. I just can’t turn down someone in need, so I’ve just gotten very lucky.
The ironic thing is that the one time we actually put money into a friend’s business and expected it back, we ended up losing $12,000…ouch. We were lucky we were young enough to bounce back. Still stings to think about it though…
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I have borrowed money from a friend and would not do so again. The friend I borrowed money from had a large amount of private wealth and initially told me that I could pay the money back whenever I wanted to. I was resistant because I did not know when that would be and knew I could not afford any more monthly payments on anything, but he insisted. I was very grateful, because at the time I desperately needed the money, but six months later when he decided that in fact I had to pay the loan back at £1000 per month (it was a £10,000 loan), it really screwed my finances up. He also began to make comments about the interest that he had lost out on. We eventually renegotiated, and I will have paid him back (including 10% on the loan, although he doesn’t know that yet) by April of this year.
Personally, I would not borrow from a friend again:
1. I felt like a loser, and as if I was beholden to him. For example, he would often talk to me whilst I was working, and I didn’t feel I could ask him not to, because of the loan. It’s a small thing and I realise it was my problem not his, but it was nonetheless a problem.
2. He kept telling me that he didn’t need the money and to him it wasn’t very much. Initially that just made me feel sad that I wasn’t in the same financial position. When he said the same thing six months later after he had asked me to pay it back at £1000 a month, I was actively bitter about it. I care for a disabled parent and at the time could not do very much work. My outgoings are high as a result and can’t be reduced beyond a certain level. It was very hard to be asked to pay back £1000 a month by someone who was also telling me he didn’t need the money back.
3. Although our friendship has survived, and I am still very fond of him, I do feel less kindly towards him as a result of the loan, which is very unfair because fundamentally he did a very kind and generous thing for me.
If anyone does borrow from a friend, they should clarify at the start whether they are paying the loan back with interest, when they should start paying it back, and at what rate. In other words, the borrower should treat it like a commercial loan. That is the only way for it to work, I think. Having said that, if I were to lend money to a friend, I would make sure, as the OP says, that it was an amount that I could afford to lose, and treat it as gone, unless it came back. I think that the problem my friend had was that he wanted it both ways – he wanted to be the person who didn’t care whether it was paid back or not, but he also wanted it to be paid back. Either is a perfectly reasonable position to take, but you can’t take both at the same time.
I want to emphasise that I remain grateful to and fond of my friend and that I blame myself for (a) borrowing the money when I knew it was a bad idea from the off and (b) having done so, not insisting on proper terms at the start.
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This hits home big time! When my girlfriend and I started dating several years ago, she tried to be a “sugar mama”. I, regretfully, allowed it with the understanding I would pay her back.
Shortly after, my son’s mother took me to court for sole custody and support. It caught me off guard but I had the funds to pay for the lawyer. That lawyer ended up getting me in more trouble so I had to fire him but was left w/ no funds for an additional lawyer. I took out a loan against my 401K and it still left me short. She lent me the rest to cover.
All of this was with the agreement I’d pay her back.
After the issue was resolved, I had a significant cut of my check removed for child support. I had promised her I’d do whatever to recover that income other ways.
Months went by that I couldn’t/didn’t pay her back. Right about the time tensions increased, my company cancelled the 401K. Instead of reinvesting, I took the cash and gave it to her – about $3K but still a couple thousand short of what I owed.
While it bought me some time, the tension remained and again the issue came up last year. We agreed I’d pay $200/month until the debt was resolved. Then I lost my job. And while I was able to still make some payments, I missed some, too.
Earlier this month, she finally broke it off. Financial stress. I’ve struggled my entire life to be financially secure, stable and responsible. She, 11 years my elder, got tired of waiting.
In hindsight, I wish I hadn’t taken her money. But, in some cases, I had to and likely would have lost rights w/ my son had I denied her help.
Even today, I’m sick to my stomach I lost the woman I love because of this BS. W/o the stress, we were very happy and great around each other.
My best advice for the borrowing side – don’t borrow if at all possible. And, even if they say it’s a “gift”, pay it back however possible; even if just $100 or so per month. Show the effort. We knew I needed to repay; regardless, the tension is just too much. You can’t afford to lose a great friend over something this simple.
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We only give.
And we keep swearing that we will never do it again… especially after the time the relative in question complained about inability to buy groceries for his five kids and then bragged about buying an XBox. But we always do anyway, although never so it hurts us anymore (that XBox actually did affect our own spending… current giving doesn’t as we make more money now). We’ve accepted that he’s bad with money, though getting better, and that he has 5 kids.
At Christmas this year, a few of our gifts to younger relatives were cash. Cash to help pay several year old wedding debt (plus Your Money or Your Life), cash to help save for a downpayment (plus JD’s book), and so on. It’s unusual in DH’s family to give money, but I think this year it was the most thoughtful gift we could give these folks.
As I get older, I find myself feeling less generous. We offered the use of our spare bedroom for 6 months (until the baby was born) to a friend in need while he went to school IF his out of state house didn’t sell, IF his wife couldn’t get a job, IF etc. He showed up expecting to stay a year, his house had sold, and with us offering housing, his wife decided she didn’t need to look for a job if she and her DH were getting free housing and she’d just live with her mom (in another city) who would provide free childcare indefinitely once the baby was born. She is no longer my friend.
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My parents have friends who were always irresponsible with their money. They would go into credit card debt and then they would ask their parents to bail them out. Their parents would always pay on the condition that they “cut up their credit cards,” which they would make a big show out of, but then go back to using again. This cycle continued for years, and ruined their relationship with their siblings (pissed that mom and dad were giving so much money to one sibling). And I am talking about 10-20 k each time. Finally, their parents died and they still received a decent inheritance as far as my parents understood it. But after a few years that was gone too. They called my parents the other day asking for money and my parents said no, and they hung up on my parents, probably on to the next call.
The point being, some people will never learn. They will live above their means and they will basically use other people. Most people who are turning to a friend for money are in this condition because who really asks a friend for a large sum of money anyway? Its usually people who are fiscally irresponsible and/or who have already used up their parents/other family members good graces.
Your a friend, not a bank. Except in the most dire of circumstances, people should keep it that way, in my opinion.
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I sold a truck to a friend who couldn’t afford it on the terms “pay me what you can, when you can”. It still hasn’t been paid off 3 years later, but I refuse to worry about it.
My renter is also behind on rent, but I’m teetering on forgiving the debt instead of caring. I don’t like stressing about the money my friends owe me.
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I’ve loaned money to friends and family three times. Twice it worked out as the friends paid me back in full when they said they would. The third time was actually a family member and she suddenly went quiet and stopped making regular payments. Eventually she did come through but it definitely put a strain on the relationship which is sad because we were pretty close before then.
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My siblings and I regularly lend money to each other, have done so for years, and have suffered no ill effects (in fact, I would say that our casual loans have made our relationships with each other more trusting).
I will begin by saying that I am about four years older than both my siblings and recently out of college. Our money lending began (in earnest) when they both started attending university themselves. My sister asked me to purchase her schoolbooks online for her since I 1) knew the best places to go for reasonably priced books, having done so for my classes 2) was comfortable purchasing things online and would not be scammed and 3) already had accounts at the necessary forums (Amazon, Paypal, eBay, etc). My brother also asked me to purchase books and other items online for him for the same reasons.
I did purchase the items, and each of them paid me the next time we saw each other (schools in two different states), despite the fact that it was a good amount of money and my sister had no job at the time (my brother did). I will admit that we already had a good relationship with a significant amount of trust in place.
This habit continued all the way through last year (they have both developed their own online identities and feel comfortable enough using the web to not be scammed), with the purchase balance sometimes getting close to $1,000 (quite an amount for any college student, job notwithstanding), and with more time passing between purchase and payback (there was never a time limit on when to pay me back) but there was never any doubt in my mind that I would be paid back.
While I realize this situation is not one many people could easily emulate, I do have some suggestions for how to reach this point:
1) Start small. Lend someone $5 for lunch or $10 for a movie if they need it. See how they treat this debt. Do you have to remind them that they owe you? How quickly did they pay you back? With larger sums of money any problems that arise would only be amplified. My siblings and I regularly loaned each other to go to a movie or out with friends, and we always saw that money return as soon as the other person had cash again.
2) Would you trust this person with your purse while you used the restroom? How about in your house while there was money in plain sight? Would you feel uncomfortable handing them your wallet to retrieve money to pay a toll? If your answer is “no” then you should reconsider lending the money if you ever expect to see it again (but all loaned money should be treated as a gift, as Sierra wrote above). Both my siblings know where I keep a (small but significant) sum of cash for emergencies/no chance to go to a bank.
It takes years to get to the point we’re at now, but I cannot express what a relief it is to know that you can trust someone to this degree. The times I’ve had to rely on one of them (or they on me) in a situation I could never have anticipated have been numerous, but because we already had an established baseline of (financial and personal) trust there has never been any question of whether or not it was the right move.
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We have loaned money to relatives many times. We’ve been repaid less than half those times. We have always considered it a gift and have never loaned more than we could afford, so we don’t have any hard feelings. I’m not sure I could remember all the times we’ve given money, and I’m pretty sure some of the recipients have forgotten as well as the money was given during times of extreme stress for them.
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My wife & I have loaned money to her parents at times. I believe they want to pay us back but have not been able. At first we, no I, wanted to view it as a contract with terms for repayment, no interest but a plan for when we would be repaid. Now, I view each time as a gift. My wife and I discuss the amount and decide if it’s more or less than we can afford to lose and give based on that. If we get paid back, great! If not, that’s great too because we still have the family relationship. Obviously this cannot go on forever. We have turned down her parents because we couldn’t afford to lose the amount they wanted. (We aren’t as financially savvy and sound as we’d like to be but we’re young and somewhat dumb and have time to correct and learn from our mistakes.)
To address a point Derek made: If I loan money to a friend or my in laws, I view it as a gift. That’s my choice on how to perceive the transaction. I have essentially no control over how the other party perceives the transaction. I have a clear conscience in the relationship because I have no expectation of a return. If it goes sour because the other party’s conscience condemns them, that’s not on me.
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I have ‘loaned’ to family and I did borrow from a friend once. (He sold me a really cheap car and I paid him for it a few months later, it worked out fine.)
I am going to loan money, I have to be willing to accept I very well may not ever get it back. In some situations, it is entirely predictable that it is just a sunk cost. The hardest thing is saying ‘no’ to someone that you have ‘loaned’ to before. Some people just need to have the financial apron strings cut off because they just will never get their act together.
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“I knew she was only asking for help because of her child”
This really bothers me. Would you not have given the money if they had been in the same situation but without a child?
I see this kind of thing all the time, things implying that those with children are worthier of all things in all regards; example: someone said “I feel lazy and selfish about not shoveling our sidewalk” and the responses to her were along the lines of “You shouldn’t feel bad about it because you’re raising a child”, effectively implying that those with children need only be responsible to their own immediate family and to no one else, but that the childless of the world need to take on the burdens of those with children, even though taking on the additional burdens of children was the choice of those who have them and not of the childless.
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What about personal loans as benefits to both parties?
I’ve been trying to convince my parents to do a personal loan, where I’d pay interest and set and pay to an agreed upon schedule. This would be to pay off our second mortgage. We’d both get financial benefits as they’d get a better rate than a savings account (which is where they have much of their money) and I’d save on interest. Our ability to pay isn’t an issue.
They said they’d be reluctant to do so because they couldn’t do the same for my brother.
I feel they just want to avoid a sticky situation. I’d like to find a way to cut the bank out and help us all out…
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I know you believe that your proposal for your parents to lend you money with an agreed upon repayment rate plus interest is a good deal for both parties; but the truth is that this is only a good deal for you. Your financial endeavors are not your parent’s responsibility and you should keep them separate. You are actually placing them in an awkward situation by asking them to be involved in your finances. It doesn’t matter that you would pay them interest because that benefit is superceded by the fact that you are placing them in an awkward position.
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I think I would have done what you did, except – instead of “thinking of it as a gift”, why don’t you truly make it a gift. That doesn’t mean thinking if they pay you back, great. That means giving it to them as a gift, and not expecting them to pay you back, and telling them that when you give it to them.
It sounds like you could afford to give this money. But people need to remember, if you can’t afford to give the money as a gift, then you can’t afford to give it as a loan either. I’ve known people to loan money they couldn’t really afford to part with thinking it was okay because they would get paid back, and then the person ended up not being able to pay after all and it really messed up their finances.
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I’ve borrowed money from three friends ($1000/$500/$300) over the years. I had it each time but in accounts that would take a couple of days to transfer to my checking account). They didn’t hesitate, ask any questions about what it was for, or when I’d pay them back (which was within the week after the transfer went through or if I received a paycheck at the time). I loaned $1000 to a friend, which she eventually paid back though we had no agreement. Family members have never asked for a loan; usually it’s in the form of covering them because their ATM card doesn’t work or I paid for a gift we were to split and they’re supposed to pay me back, but I don’t sweat it when they don’t as they are not large sums and it all probably comes out even in the end. I did have a friend who lost her job, and instead of money, I let her stay at my house for a year. She’s also owed me little bits of money here and there, but I honestly think she forgets as it’s not habitual and she’s not the type of person who takes advantage. Not like another friend who was always borrowing $20 from whomever and made a stink when you asked about it, like it wasn’t a big deal. That’s not the only reason we’re not friends anymore, but I don’t miss that aspect of it.
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I’ve borrowed money from a long time friend twice. Both times we created a contract, both times included interest and the first time I paid her back on time; the second time I paid her back well in advance. Both times helped me move, once after my divorce. I’m pleased to say that I am now on track to pay down my debt, and build emergency savings and I hope to not have to borrow money from her again. I prioritized paying her back over higher interest debt because it was important to me.
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@18 A
Yes, with children it is different, because it isn’t the child’s fault that the parents are bad with money. If a child doesn’t get fed, that can have negative long-term consequences that not feeding an adult will not have. If we lived close enough to just buy groceries, we would. But the local grocery store is Walmart. Nobody is saying you have to shoulder anybody’s burden, but personally I am more likely to give when it means a kid is getting fed or educated than when it just means someone is going to lose their SUV. People with children aren’t worthier, but the children themselves are worth something.
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1. Don’t loan or gift money that you’re going to desperately need in 6 months.
2. Don’t loan (big) money to people you’ve known less than a year.
3. Don’t loan or gift money you can’t live without.
4. Don’t loan or gift money if you’re going to be a jerk about it.
5. Don’t loan or gift money to someone you’re dating.
6. Don’t invest in a friend’s business if you can’t handle losing everything you invested.
All of those tips will help keep you off of daytime court shows.
Actually, I only needed one rule to guide me in life and it was pretty simple: “Don’t let your friends borrow… give them what they need and only give what you can give away.”
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The point made about seeing how others act with small loans is a good one. I would also advise seeing how people act in a social setting as a possible litmus test. If someone is always taking advantage of someone else’s generosity during social events (eg, buying a round, picking up the tab for a movie etc.) it may be telling of how they would act in a loan situation. Obviously there are circumstances that can’t be avoided, but in some cases it boils down to selfishness and a lack of empathy on the part of the borrower. For me, there has to be a massive level of trust before I would consider lending money to a friend, and even then you have to be aware that it may never be repayed.
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There is a reason to “get it in writing” and it’s called divorce. If, say, a parent loans money to an adult child, they should have a written repayment agreement. If said child later gets involved in a divorce, without the agreement the money will be considered a gift to BOTH marriage partners. With a loan letter, both parties will be obligated (and it becomes part of the settlement). Believe me, you don’t want your soon-to-be ex spouse claiming your parents gave him a big gift with no obligations.
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My best friend since childhood and I were living together when we were both putting ourselves through college. She had a better job and some savings – my tuition was due, but my loan money was late in coming due to some filing error. I didn’t have my share of the rent / utilities and she covered me and gave me extra to get me thru until I got the loan check. All in all it was about $800 that I paid back in full a little over a month later.
Years later now – I am married with a good job and she had just graduated from grad school and gotten over a serious life threatening illness and imagine, was having trouble finding work. Even living back at home she was out of money with no income. She was selling items and doing everything she could to come up with cash and I finally begged her to take some money. I gave her $500 – the most she would take and now six months later she has paid me back in full and is working full time.
I think a lot of it depends on the situation and the person – like April said is it someone who has constant money problems, or someone who is having a rough patch? Do you trust them and can you afford to lose it? If you can answer all of those questions and be okay to lend the money then do it. This girl has been a godsend in my life – she and my husband get along amazingly well and we were happy to help her in a jam.
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As the saying goes, “If you lend a friend $20, and never see them again, it was probably worth it.”
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Sadly, no one who knows how to handle money ever needs to borrow from friends, and that puts me in a very bad situation as a loaner. Most americans lack even basic common sense concerning money, if I loan you any serious amount of money in some emergency situation, only spend money on necessities until you pay me back. Unfortunately it never works out that way.
What makes the situation doubly bad is that same brand of financial idiot will virtually always take major offense if you don’t loan them money. It can kill friendships.
So, what’s the answer? Get smarter friends who don’t get into those situations.
I agree wholeheartedly with the message here though: don’t loan friends money, give what you can as a gift without expecting to get anything back
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I agree – I’ve never ever had to borrow money from friends. One friend in particular has zero debt with any financial institution, is now 30, has a full-time office job and still needs to borrow $20 here, a few hundred there from me. I have credit card debt and a car loan but have plenty of cash-flow to feel comfortable. I feel like asking him for money so that I don’t have to pay interest on my loans because that is what it is like he is doing. So effectively I’m paying interest for him. Plus I feel like saying it’s time to grow up and learn how to manage money. You shouldn’t have to borrow $20 from a friend in your 30′s (unless something terrible happened to you). Right?
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I would dearly like to invest in one of my best friends. He is fantastic at what he does and I think he could be a success if I were to loan him the money to open a small business. However, he is not great with his personal finances and this has me concerned …
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As a point, all the paperwork in the world with respect to payback won’t mean squat if the person can’t pay back. So even with paperwork you should be prepared to lose it. I lent a friend $5K once. At the time he was technically a millionaire but said he needed a dose of liquid cash and his was tied up until the end of the month. I’m not naive and knew full well if he was tapping me he was in trouble, but he is the reliable sort and a good friend. We drew up proper paperwork with a repayment schedule, etc. and he did make a couple of payments before everything went belly up on him. Technically I could have taken him to court and won the lawsuit, but he lost everything. He’s tried to make up for it by making me a silent partner in half a dozen of his start ups but though he’s managed to support his family (just) none of those have really provided more than that and I’d have felt I was taking it from his kids. Had just one of the things he’d tried taken off like his first enterprise had, I’d have made back all the money plus enough to unfurl my spouse’s eyebrows whenever the subject comes up with her. It was a risk, I lost, we’re still friends.
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I loaned about $6k to my brother when he was in dire straits. I did stress the fact that I needed the money back but this was only because I knew my wife was going to have issue with it. Deep down, I knew I’d never see the money again and I’m honestly ok with that.
However, it pains me that he doesn’t take repayment seriously. He’s been in the middle of a divorce and custody proceedings for some time now, and the last thing I want to do is divert money from his kids. I recognize how important their time together is.
But the communication just isn’t there. He avoids me rather than have to deal with the elephant in the room, which breaks my heart. If he were to sit down with me and tell me he could only afford $5/month and then stuck to it, I’d be absolutely fine with it. Instead, he hands me money at family functions every so often. I’m guessing he’s repaid maybe $1k of it, but I haven’t seen any in many months. I’ve actually never kept track of what he’s repaid because I knew it would stop eventually and I’d never be repaid the entire amount.
It may sound like I’m dwelling on the money, but I could care less. I suppose this is more about our relationship than anything else.
If he needed it, I’d do it again in a heartbeat because I love him.
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We have been very blessed to have been able to borrow money from my M-i-L… Seriously, she loaned us the money to pay cash for our house about 6 years ago. I make sure that she is the first person/bill paid every month.
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Hi – I´ve read in Suzette Haden Elgin´s book about “Grandmother Principles” that she suggests a sort of “Family fund” that can cover crisis-situation like not being able to pay for rent one month – and to whom everybody in the family contributes. I find that idea a very fine one to be able to sustain the near-family. I wonder if such a system would be also possible among friends. (There is even a scenario written about when someone wants to withdraw from that fund). What are your ideas about this?
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April, you’re exactly right with point #2. Give as a gift and don’t expect to be repaid.
I’ve had to borrow money from a family member a few years ago. We wrote up an agreement for me to pay him back in a year. I started paying him back monthly and paid it off by the end of the agreement.
I could never image NOT paying anybody back.
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I have a friend who is just unable to save money. We used to be co-workers and then I found a better paid job. She started to ask me small loans, just to cover her bills and groceries until payday and avoid overdraft. She always paid me back but it started to happen too often, and I was irritated by the fact that apparently all her money went in compulsive shopping (clothes she never really used) and other not necessary stuff. I then told her I started to save and couldn’t lend anymore and I believe she then targeted another friend. It didn’t affect our friendship, because she always paid me back straight away, but most of all I always think this experience saved me a lot of money on the long run, because when she came out with the idea of starting up a practice together I saw what was coming and said no, even if that really sounded like a great idea. We can be best friend with someone and still don’t trust them on a financial point of view. I think some people just don’t give enough value to money, are too generous when they can’t afford it and the idea of personal finance seems just incredibly sad to them.
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My parents were kind enough to lend me money so I could buy a grand piano. I teach, occasionally perform, and also work a day job to support myself. I could have gotten a loan through the bank but my parents were worried that if I had done that I might not be able to get a loan for a new (used) car since mine was nearing the end of its life. They offered to lend me the money and we figured out a monthly payment plan that I could handle. I am so grateful for their help. There is no way that I would default on this loan. In fact, if all goes as planned, I’ll be paying them back early.
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I think it’s easier to borrow or lend from friends when you are younger – both parties are still learning the ins and outs of dealing with money issues, and usually the amounts are somewhat small.
This changes, of course, when everyone “grows up” or enters their 30′s and beyond. Singles become couples, kids show up, etc. I believe this story outlines the ideal way to handle loaning money to a friend: talk it over with a significant other, forget the contracts, and think of the loan as a “gift”. Apparently it worked: the friendship remained – the biggest priority. Sorry to see things haven’t panned out for your friend – however, after years (as mentioned early in the post) of financial struggles, she’ll eventually (one hopes) tire of living on the edge and make some changes.
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I think you and your husband did it exactly right. I’ve never loaned more than $100 to a friend, but in every case I felt that it was money I could “afford to lose”. With that attitude you don’t end up harboring resentment if you don’t get repaid.
It’s also important to make clear that your loan/gift is a ONE-TIME event, to cover exceptional circumstances.
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@Elle – You say you are going to pay it forward. How about paying it back? Your friend is out $500!
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#20 E -
I can’t speak for everyone else, but everytime we’ve been asked for a loan, we’ve told the recipient we didn’t expect to be repaid. Sometimes that sentiment is met with a thank you, but most of the time it is met with, “No, I want to pay you back.”
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I witnessed a situation which made me think twice about referring people for a job. Would you be willing to give the friend a reference or hire him if you knew there was a good chance it would go horribly wrong?
This is what happenned to two of my friends. My friend John was out of work. Our mutual friend Dan was a manager of a business and offered John a job. JOhn lied on his job application, relative to previous criminal infractions. It turned up on a criminal records check, and that reflected poorly on Dan.
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I bought a car from my step brother once for $1000 and made $100 per month payments – ended up paying it off early and never missed a payment. It worked out well for both of us with no hard feelings.
I had one friend who borrowed $500 from me, paid it back, in full, two weeks late, but paid it all back.
I have loaned my mom money once. She paid it back the next paycheck. Mom is a budget machine, and in her older age, had forgot to pay the life insurance bill. It wasn’t a large amount (under $100). Mom never asked me for another dime.
I have loaned my brother money once – he is also a budget machine. He paid it back, with interest, ahead of time. It was $4K for a Harley! Then brother asked me for more money, and I declined because I told him that our relationship was worth more.
I will never again ask anyone else for money in my personal life, and if I loaned money to my family again, it wouldn’t be a loan, but a GIFT.
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30 years ago, my sister asked me for a very large amount of money- $25,000(basically most of my savings) so she could buy a house. Her boyfriend told me that it would be a big tax break for me. I went to a lawyer who said a) there was no tax anything for me b)never lend family or friends money if you can’t afford to write it off as a gift c) there willl be unhappiness(he was also a friend- but Ip aid for this consult). I didn’t lend her the money and she couldn’t buy the house. I also told her my lawyer said there was no tax break for me and that the amount was almost all of my savings. She was angry for a while but that has been over for years.
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Yeap, give it as a gift and don’t expect to see it again anytime soon. I give money to my mom because I know she is financially responsible. I don’t give to my dad.
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Egad, you people are all so generous…
I just don’t loan money beyond lunch and drinks (which are usually paid back by other lunch and drinks). But now I feel a bit stingy
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We loaned money to my BIL and his girlfriend two different times. Both times it was between $200-300, both times we were repaid in less than a week (along with a warm note thanking us for the help.) In that situtation we didn’t hesitate becuase we knew it was not a symptom of ongoing money troubles.
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Look at it as a gift not a loan, and suggest a non-money way they could pay you back if they want to. Fix a gourmet meal for you and your honey onyour anniversary every year, watch your kids so you can take that night class you always wanted, ect… Some favor that you would only ask them, that would somewhat equal the amount of the loan. Then you are both happy. I was asked for a loan by my best friend a couple of years ago. She was desperate and crying, and not the kind of person to ask for help, so I knew that it wasn’t an easy thing to do. I never really have any money to spare but I had just gotten a suprise bonus at work, and I didn’t hesitate to say yes. But I knew that because of her cirumstances she would never be able to pay me back and her pride would be hurt if I posed it as a gift. Both of those would damage our friendship – which I value greatly. I was painting several rooms at my house at the time that had damaged drywall and she is good at drywall. I told her if she helped me out with that we would be square. She helped me above and beyond what I could have expected. If anything, our friendship is better now.
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I had to borrow money from my parents when my husband left his job and started his own company. At the time we had 2 car payments and couldn’t manage them both, but we needed the cars in order to keep both our jobs. My parents offered to let us use their Home Equity Line of Credit to consolidate the car debt. It has helped us immensely and we dutifully pay every month…not as quickly as I would like, but it WILL be paid off. The cars would have been repo’d or sold otherwise. I am thankful that my parents trust us enough to have helped us in this way.
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My wife and I loan to and borrow from family members all the time, always at 5-7% interest with monthly interest-only payments made. It works out great for everyone involved. For example, while we are saving up money for real estate investment, we loan it to her father’s business to pay down a bank line of credit, for which he pays us the same interest rate he’d be paying the bank. We can get the money back almost instantly (by him redrawing from the credit line) and in the meantime we’re making a few hundred dollars a month interest.
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