The right way (and the wrong way) to lend money to family and friends

There are those who believe that money writers lead perfect financial lives. Ha! Would that it were so. When we get together, we often share stories about the dumb things we’ve done. Today, my friends, I want to tell you about an instance in which I failed to follow my own advice, an example of how not to get rich slowly.

For several years now, one of my indulgences has been season tickets to the Portland Timbers, my home-town’s professional soccer team. I’ve been a Timbers fan since I was six years old. I used to listen to their exploits on the radio during the 1970s. I can still sing “Green is the Color” from memory:

When the new Portland Timbers joined Major League Soccer in 2011, I jumped at the chance to buy season tickets. (Here's video I took from the Timbers' first MLS game.) After Kim and I decided to embark on our RV adventure across the U.S., I thought I’d have to give up my seats. I was sad. But then my friend Joe made a great suggestion: “Why don’t you sell them to me for the season?” A win-win, right? Well, sort of…

What NOT to Do

Joe paid me for half the season when I renewed the tickets in the autumn of 2014. Before Kim and I left on our RV trip in March 2015, he gave me an $800 check for the remaining balance. Then, on the night before we left Portland he sent me a text: “I'm in the process of changing banks…If it's no difference to you tear it up and tell where to send a new check.”

I replied with my home address (which Joe already had) but didn't hear back. I sent another text in April but got no reply. In May, we connected. Joe agreed to send the check to Colorado, where we'd pick it up while visiting Kim's mom. It took me a while to reply with the address, but when I did nothing happened. No big deal. I'm an easy-going guy. I figured we'd just connect elsewhere on the road.

How Not to Lend Money (A) How Not to Lend Money (B)

In September 2015, Joe and I finally connected again. He told me had a check sitting on his desk, ready to mail. I suggested he send the money by Paypal and gave him my contact info. Nothing happened. I pinged him again the next week. Nothing. The week after that, still nothing. When we finally connected again in late October, Joe had a sob story for not paying but promised to send the money right away.

The holidays came, and I forgot about the $800. But Kim didn't. The debt gnawed at her more than it did me. “I can't believe Joe hasn't paid you,” she said. I shrugged.

In late February 2016, Kim sent Joe a text asking if he was ever going to pay. This made Joe cranky. He texted me and asked what was up. “I did pay you,” he said. “I sent the money by Paypal.” I checked my Paypal account. I had never received payment from him.

I sent Joe an email outlining the entire sequence of events. I tried to keep my tone calm and reasonable (because truly, I wasn't angry) but I wanted him to see things from my perspective: He'd had a year to pay me for the tickets, but hadn't managed to do so.

Joe wrote back immediately:

This is insanely frustrating. First of all JD. I think you’re a great dude, and I appreciate what you were trying to do here for both of our benefit. You clearly have a good knack for letting things slip thru the cracks.

While Joe wasn't wrong — I do have a knack for letting things slip through the cracks — I found his logic puzzling. His failure to pay was a result of my slow replies? I wrote back:

It's not my responsibility to manage this situation. I haven't let anything fall through the cracks. You are the one who owes the money. As such, you are responsible for paying in a timely manner. You, as the debtor, are responsible for repaying the debt without the lender having to hound you.

I've given you my mailing addresses (and Paypal addresses) repeatedly yet never received payment. I've also followed up several times without any sort of reply from you. It's true that I haven't always been prompt in my own replies — I own this — but that lack of promptness in no way changes the fact that you've had the info you need to pay since March 30th of last year.

I don't want to argue over who should have been better at communication. I love my big buddy Joe and don't want you to feel like I'm dogging you. As I said before, I'm not angry. But I think we can both agree that we need to get this fixed.

Joe never replied to my email. It's now February 2018, two years since I last heard from my friend, and I suspect I'll ever get paid. One thing's for certain, though: At this point, our friendship has disappeared, and that's too bad. (I, for one, would be happy to patch things up. I like Joe!)

I'm not sharing this story to demonize Joe. Obviously, I think he's ultimately responsible for this situation, but I acknowledge that on my end, I've been a poor communicator. Plus, if I had deposited his check when he gave it to me before the RV trip, none of this would have happened.

No, my aim here is to provide a real-life example of what can happen when we lend (or borrow) money from family and friends. There are smart ways to do this and there are dumb ways. Joe and I chose a dumb way. (And yes, I realize this didn't start out as a loan, but that's effectively what it is now.)

Let's look at the right way to lend money to family and friends.

The Right Way to Lend Money to Family and Friends

When a friend or a family member asks to borrow money, your first inclination is probably to help. But many people have learned the hard way that friendships and finances make a poor mix. My interaction with Joe is a typical example.

Not all loans between family and friends end in disaster, of course. In fact, although I've never been able to find stats on the subject, I'd be willing to wager that most loans go smoothly. But the potential for trouble is so great that you should think twice before lending (or borrowing) money. How would it affect your finances — and your friendship? Even when things do go right, the situation can get awkward.

For instance, in 2011 I made a large loan to a friend for a business project. That project fizzled. For the past seven years, my friend has always made his payments on time, but he's had a tough time paying down the principal. For most of the life of the loan, he's made interest-only payments. (This is a good deal for me, but not for him.) My friend I have maintained a good relationship, but it'd be even better without the money situation looming over our heads.

You can save yourself a lot of grief by knowing in advance what you'll do when somebody asks to borrow from you.

Some people decide they'll never make personal loans. If they're asked, they say something like, “Sorry, but it's my policy never to lend money to people I know.” If you think this is too harsh, you can offer to help in some other way. Most of the time, you're probably better off saying “no” than putting yourself in a position where you have to hound a friend for money, as I've had to do with Joe.

Despite these warnings, some of you will be tempted to lend money. If you do, follow these rules. You'll be glad you did.

  • Discuss other options. Are there other ways to help? Sometimes people think money is the only way to deal with problems when there are actually other ways to offer assistance. Figure out what the root problem is and see if there are other ways to help solve it without donating dollars.
  • Lend only the amount you can afford to lose. You may never see the money again, so don't put your own financial well-being on the line for your cousin Bob. Make sure your own situation is solid before you lend money. (In my case, losing the $800 Joe owes me does hurt, but it doesn't change my life trajectory.)
  • Be clear about your expectations. Draw up a payment plan. You can use the online calculator at Bankrate.com to create a loan schedule. And discuss what will happen if something goes wrong.
  • Get it in writing. At LawDepot.com, you can fill out a web form, and for $15 you get a complete promissory note. There's also a free sample template at ExpertLaw.com. When I loaned money to my friend for his business project, we had an actual written contract.
  • Deal with problems right away. You may feel you're being kind by not sending a reminder that the payment is 30 days past due, but you're just setting yourself up for trouble. Let the borrower know you're keeping track. This is where I failed with Joe; I didn't like reminding him to pay, so I went radio silent for several months thinking he'd simply man up. He didn't.

Here's another idea: If you can afford it (and if it seems appropriate), consider giving the money instead. That way there's no ickiness on either side. If you get paid back, great; if not, you can feel good about helping out a friend in need. And remember: It's always okay to politely refuse.

After my disaster with Joe, for instance, I decided to do something different with my Timbers tickets during the second year I was on the road. I simply gave them to Kris, my ex-wife. I know she loves going to the games just as much as I do. “Do you mind if I share these?” she asked. She ended up distributing them to our mutual friends. I lost out on the cost of the tickets in 2016, but I got to save my seats, I avoided hassling anyone for money, and my friends got to enjoy the MLS-champion Timbers in action!

One last thing: At some point, you may be the one borrowing money from a friend or family member. You should do this only if you can't boost your income or tap an emergency fund. When you borrow, explain exactly why you need the money, put the deal in writing, and then stick to your word. Be proactive.

Keeping your word is the most important part. That means repaying the loan as promised — or sooner, if possible. Take this as seriously as you would any other financial obligation; in fact, take it more seriously. If you don't pay the bank back, you'll damage your credit score. But if you don't pay back a friend, you'll damage that friendship and your reputation. You don't want to end up like me and Joe…

More about...Relationships

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Church
Church
2 years ago

Very sorry to hear about your friendship and how things turned out. I’d like to think true friends would go above and beyond to make sure all debts are paid, but that is not always the case. Now you see someone’s true colors. Some guys believe you’ve got the money to float them and others are considerate and pay upfront.

Anytime I have lent family/friends money, over communicating has been most effective.

A sensitive topic, indeed, but thanks for sharing.

Wise Money Tips
Wise Money Tips
2 years ago

Another thing to consider is that if someone cannot get a loan from a bank, then you probably should not lend that person money either. Unless, of course, you are okay with the likelihood of not getting paid back.

Lending money to family and friends with high expectations of repayment can definitely strain relationships. Gifting money is another story altogether.

Accidental FIRE
Accidental FIRE
2 years ago

Sorry to hear about your experience with your friend Joe. My goal in life is to avoid this all together – both the borrower or lender side. So far I’ve been successful.

Dave @ Married with Money
Dave @ Married with Money
2 years ago

Ick, what an unfortunate situation with Joe. The money is a bummer of course but losing the friendship is really sad 🙁 Sorry to hear things still weren’t patched up…

My general rule of thumb is to avoid this type of situation at all costs. BUT if for some reason we must (we haven’t yet), w’ell treat everything as a gift. If we get paid back, great. If not, great.

lmoot
lmoot
2 years ago

I only lend money I can afford to lose as a gift, or wouldn’t mind losing as a gift. I never would let the borrower know this, as I would just let them think it’s a loan. Generally I don’t even loan money, I’ve only done it twice for my best friend of several decades. She is a trustworthy and honorable person, and even if it did/does take her a while to get it back to me I know I will get it back. It hasn’t affected our friendship in the least. If I lend out money in the future… Read more »

Chip
Chip
2 years ago

100% agree that if you can consider just gifting the money. It’s incredibly freeing to bless someone one that way when you have the means and you will never regret or miss the money that you let go of for the good of someone else.

KDT
KDT
2 years ago

Simple. Never let anyone borrow money under any circumstances. If someone that you care about needs your help, give them the amount of money you can afford to give them and call it a gift.

About half the time, we’ve found that our friends would give us back the money anyway and the other half we didn’t worry about because we said it was a gift.

JoeHx
JoeHx
2 years ago

I don’t like borrowing money off the books from friends. The few times I have (and it’s more a case of needing cash and not having it on me at the time) I pay it back as soon as possible – probably within a week – because I’m terrified I’ll forget. If I buy something from a friend’s kid (like girl scout cookies) I won’t take the product until I give them the money. I have loaned money to my brother before. Even though he’s not the most financially responsible, he paid be back every time. I think it’s only… Read more »

S.G.
S.G.
2 years ago

I’ve been on both ends. I borrowed money from my mom, but it was for her benefit as much as mine. She is very risk averse and had a bunch of cash sitting around. I wanted to refinance my house but had a small second mortgage on it that would have severely complicated the situation and I didn’t want to liquidate all of my investments to make it work. We set up a simple interest payment via bankrate. She laughed at how much interest I insisted on paying. When I got a bonus and paid the whole thing back I… Read more »

Katherine Keller
Katherine Keller
2 years ago

“Make new friends, but keep the old, one is silver and the other gold.” JD, I’m sorry about the situation with Joe, but there’s yet a 3rd spin you can put on it — it only cost you $800 to get plated ware out of your life. The hub & I have long since stopped giving any money to his side of the family and we are careful to make sure they don’t get our home address, phone numbers, or any kind of financial account numbers. With one exception (his late sister) it was never paid back/offer-in-kind, and they only… Read more »

sequentialkady
sequentialkady
2 years ago

On the flipside I had a really positive experience with a (disabled) friend I helped out of a crisis you really can’t plan for (toddler flushed the only set of keys to your ancient clunker) about a month after his wife had been laid off with a baby on the way … just before Xmas. I got PM’d out of the blue with the repayment plans. Two payments of X or one payment of Y 3 months from now? I told him it was a gift and to pay it forward. Donate X to a charity and save the other… Read more »

infmom
infmom
2 years ago

My family members are hopeless with money and always have been. I, on the other hand, after answering way too many calls from bill collectors for my parents, have been financially independent since I first went out on my own. My husband and I have never asked anyone for one red cent. We solved our own financial problems (and we did have some, in the days when our income was just barely enough to live on). We take pride in standing on our own two feet. I have, in the past, lent money to my brothers. It was always understood… Read more »

stellamarina
stellamarina
2 years ago

For elderly people, the thing to really watch out is family members borrowing their retirement savings money and then thinking they do not need to pay it back “because we are going to get it one day”!

Mr. 39 Months
Mr. 39 Months
2 years ago

My general take on this is to never lend to family and friends. If they need the money, I “give” it to them, and tell them its a gift. If they end up giving me the gift back, so much the better (so far, nobody has done that, ha ha).

I have seen too many friendships and family issues blow up over something like this. My family and friends are worth more to me than the money.

I also would only give them a gift as large as I could afford to “lose” and no more.

Mr. 39 Months

WantNotToWantNot
WantNotToWantNot
2 years ago

Totally agree with those who have said “gift it” and don’t lend it. Decades ago, I had a friend who was a struggling actress and going through a bad patch financially. I had had some good luck. She hinted at needing a bit of a bailout, so rather than loan the money, I gave her several hundred dollars (which at the time was a lot of money to both of us). I made her agree that she could thank me for it then and there, but I really didn’t want her to be thanking me endlessly forever, mentioning it again… Read more »

BusyMom @ CountdownToTranquility
BusyMom @ CountdownToTranquility
2 years ago

I agree with the part where you said, give it, not lend it. When someone asks us for money, we only”lend” it if we think we can give it to them. Sometimes, they feel better if they think it is a loan, so we don’t often tell them that we don’t really expect it back. Plus we don’t want to be known for handng out money 🙂 If and when they pay it back, we are happy. If they don’t, we never bring it up. Sometimes, people ask for some amount, but we give them less, because we aren’t comfortable… Read more »

Matt Spillar @ Spills Spot
Matt Spillar @ Spills Spot
2 years ago

Sorry too hear about this situation J.D. and thanks for sharing your experience. Lending money to friends and family is always risky, and this is a perfect example why. It’s a shame that he took advantage of the situation and ruined the friendship when it didn’t have to be that way. I like the advice to either avoid the lending altogether, or give it as a gift. For any other situation, best to get it in writing and keep constant communication.

Jan
Jan
2 years ago

We have gifted and lent money to our children several times. Usually we consider money gifts (wedding, first house, family travel, baby gifts). One case, though, money was lent to pay off a very high interest card at our suggestion. We laid out payments, with no interest, for three years. At times they wanted to simply pay it all off, but we decided that the monthly habit helped with not getting into the credit card debt again. In the last three years they have paid off a car, put a great deal into the principle of their house, created a… Read more »

Bernz JP
Bernz JP
2 years ago

Sent the money by Paypal huh? I don’t think he still intends to pay you after what, over three years now? I’m surprised you still call him a friend. I’ve actually done both (family and friends) the family member paid me, but the friend still haven’t. However, he still calls me and we still hang out once in a while, and he always reminds me of his intention to pay. They are currently in a bad financial situation, and I fully understand that. In fact, his wife will even call us almost every month acknowledging the loan and that they… Read more »

Mrfireby2023
Mrfireby2023
2 years ago

Never loan money to a friend, or you’ll destroy the friendship, same goes with family….UNLESS they can provide collateral! A dear friend of mine’s wife was diagnosed with cancer recently and he was explaining to me his family insurance deductible was $7000. and he lacked savings. I offered him a Collateralized loan (one year term 2% interest rate demand note, and I drew up an official loan document). I required holding his Rolex watch (box, papers, everything) in safe keeping as collateral. His Rolex can be flipped for approx. $8000. This is the only loan I’ve ever made to anyone… Read more »

FRANK
FRANK
2 years ago

This hits home big time. For a period of time, 10-13 years ago, my sister came to me repeatedly for money. Some of the lack of funds was due to gambling, some due to living on one low income. She used the kid card, as in “we will be kicked out, your niece and nephew won’t have a place to live”, and like a fool I couldn’t say no. Jump forward to today, and, that debt is still sitting on my credit card. Fortunately, I’ve kept the interest at an average of 2%, through balance transfers. The grand total, as… Read more »

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