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How to Lend Money to Family and Friends

by Miranda Marquit

The current financial climate probably means that you have family members and/or friends who could use a little financial help. They might even come to you looking for a little loan. Lending money to family and friends is always tricky, since nothing can destroy a good relationship like a fight over money. If you feel like you want to help by lending your family member or friend money, here are some tips that could keep your relationship intact:

1. Don’t Lend Money in the First Place

The #1 tip for lending money to family and friends is not to do it. Working out the terms of a loan can be messy, and it requires discussion about sensitive money topics. Consider making the money a gift, rather than a loan. Get yourself in that mindset, and don’t expect anything back. Make sure you examine yourself to ensure that you aren’t going to have bitter feelings over your gift down the road, and make sure you can make it a true gift, without expecting anything in return.

You can also consider alternatives to giving money. Offer to babysit children while your friend or family member looks for a job. Buy groceries on an occasion, or provide a gift card to the local grocery store. Be available to help with transportation, let your friend or family member stay with you for a couple of weeks, or look for other ways to fulfill needs in a non-monetary way. If you aren’t comfortable handing over cash, find other ways that can help alleviate the stress related to a money crunch.

2. Be Clear About the Terms

If you decide that lending money is the way you are going help, you need to be clear and up front. This means you have to power through your discomfort of talking openly to others about money, and just lay it out there. Find out what the money is needed for, and create a repayment plan. Make sure you are clear in your expectations for payment. It can help to create an installment plan, starting in a few months, so that your borrower does not feel the pressure to pay it all back at once.

You can also discuss interest. Many people prefer not to charge family and friends interest. However, if you want to, you can arrange for a low rate of interest. Just remember that if you receive earnings from the interest, you will have to report it on your taxes.

3. Create a Contract

After you have hammered out the details of the loan, it is time to create a contract. Contracts entered in via email or text message are binding, so that can be helpful if you are arranging a loan over a distance. Make sure that everything about your loan is included in the contract. Spell out the terms, and make sure that the borrower explicitly agrees to the terms. You can even get a template for such contracts, although a simple email with bullet points works as well. A witness might even be helpful in sealing the deal and making it official. Try to make it clear that the loan is a business/professional relationship and not a personal one.

Use a 3rd party to enforce the contract. One way to formalize the loan is to use a 3rd party service, such as Lending Club or Prosper. The family member can list their loan on either of these services and you can agree to fund all or a portion of the loan. An added benefit to you is having a strong legal basis for the loan, and potentially other lenders to take some of the risk, and the borrower benefits by having their loan funded and the loan counting toward their credit rating. You can learn more about these companies at their official sites: Lending Club, and Prosper.

4. Show Consistency

Finally, make sure you are consistent in your policy of lending money to family and friends. This is important, especially if you have other family and friends who may need help. Offer the same terms to others, unless someone else shows a higher risk. Develop your own “credit scoring” method that can help you explain why someone might be “approved” for more money, or a lower interest rate (assuming you charge interest).

Bottom line: Things can get messy when money is involved. Before you lend money to family and friends, consider your situation, and think about the consequences, financially and emotionally, that could arise from acting as a lender to your family and friends.


Published or updated August 2, 2010.
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{ 5 comments… read them below or add one }

1 Rita

If I cannot give them the money I just say I can’t. To ask them to give it back in better times just does not work. There is always a need or a want. The money will not be returned and then there will be hard feelings. So I give the money as a gift or I do not give it at all. I’m firm about this and have never lost a friend because they did not pay me back. Also, even gifts are touchy. I’ve given a gift of money when a friend told me she was in dire need. It saved her at the time but embarrassed her to have to ask and we’ve not been friends since even though I have put forth extra effort.

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2 Money Obedience

I’d imagine that this is a touchy subject for many people. It is for me since I lent one of my brothers a hefty sum of money years ago. He has not repaid the amount after he took it under false pretext. I don’t think there is any way to guard against something like that except for not lending money in the first place. The good news is that I did learn my lesson and that I got to know him a little better. Had I never lent him money I would probably still think much higher of him than I do now. There is nothing wrong with adding a little reality to our perception of our family members.

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3 basicmoneytips

I think the best opinion is #1, although it can sometimes be the hardest. Also, I think you have to look at the circumstance and each one is different. If you have a family member who has repeated behavor of some type of self destruction (ie, quitting jobs, laziness, etc) and they know they will always get bailed out you probably should not lend to them. However, if this person has been with a company for 10 years and is suddenly laid off and is really looking hard for a job without success, I may consider loaning them money or helping out.

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4 Greg McFarlane

Miranda, have you ever actually done any of the things you recommend (aside from No. 1)?

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5 Miranda

@Greg: No, I haven’t, since I don’t lend money to family and friends. I am perfectly happy to provide various forms of assistance (a number of family members have lived with us while looking for work and/or a place to live). We have been known to give large gift cards for birthdays when we know family members or friends are in trouble, and we have bought groceries for others, and are available to help with babysitting. We are consistent in our efforts to help others, though, making it a point to be clear about how long we are willing to have people stay with us, and being clear about our expectations for them actually looking for work, etc., while staying with us. However, if I were to lend money out to family and friends, I would be very up front about it, clearly stating what I expected (since that’s the sort of person I am), and I would probably create a contract via email. Although I doubt very highly that I would charge interest.

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