How to lend money to friends (without ruining the relationship)
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:
Talk with your spouse
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.
Don’t consider it a loan
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.
Help solve the problem
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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There are 179 comments to "How to lend money to friends (without ruining the relationship)".
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.
If you make a deal and if the lender says he will pay you back then it is not a gift. My Bro. says I will use my gun as collateral so I got his gun now and gave him two weeks to pay it back . He says I am being a jerk by not believing him. Now I am the jerk for lending him money. GO figure. I should have known. Want to by a used shot gun?? lol
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.
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.
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.
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.
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!
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…
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.
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.
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.
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.
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.
Um, no You are a business owner, please don’t be a doormat. You aren’t made of money hints why you have a business.
Always set-up terms in a contract with in-tent for repayment cars or big purchases. Monthly rental terms- clear text, late payments incurs 50$ late charge and something to get their attention so it gives them incentive to pay on time.
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.
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.
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.
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.
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.
“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.
Very good points. Thanks for bravely sharing this viewpoint–a very unpopular one. Childless myself, I’m too often expected to assume additional responsibilities at work and in my community, responsibilities I won’t be compensated for. And if I refuse–I do have my own personal life–there are usually lasting negative consequences. Consequently, I’ve become far more generous to my acquaintances without children, witnessing how often they are taken for granted, how often it’s assumed that simply because they don’t have children anything is within their reach, and they therefore aren’t worthy of the help and consideration of their communities.
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…
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.
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.
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.
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.
@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.
Nicole, no disrespect meant, but your reasoning sets up a false dilemma. It’s not that either a child won’t eat OR an adult without children will lose her/his SUV. Adults without children may fall on equally hard times, despite contributing to their communities consistently and having done their utmost to live financially responsibly. Moreover, there are already a relative abundance of social services to care for needy children and families with young children, but far fewer such services geared towards helping adults without children, so that the latter may actually experience greater risks during life emergencies.
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.”
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.
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.
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.
As the saying goes, “If you lend a friend $20, and never see them again, it was probably worth it.”
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
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?
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 …
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.
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.
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.
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?
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.
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.
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.
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.
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.
@Elle – You say you are going to pay it forward. How about paying it back? Your friend is out $500!
#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.”
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.
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.
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.
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. 🙂
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 🙂
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.
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.
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.
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.
When I was in college, my sister, who not the most responsible person at that age, asked to borrow $20. I made her give me her entire CD collection as collateral so I could get my money back. She paid me back quickly and has never asked to borrow money again.
Now that I am not a starving student, I really like the idea of giving it as a gift and hoping but not expecting it back.
I’ve given money and “loaned” money but expected it to never be paid back (it never was). If a person feels beter telling me they’ll pay me back, promise, I say “Sure, no problem.” But I never expect the money to come back. Sometimes it has, sometimes it hasn’t. I don’t care. As for me borrowing– I borrow from my parents and my parents alone. They don’t judge me or hold it over my head. Usually they are really short term, like a couple of weeks or a couple of months, and it’s been to cover shortcomings in child support. I expect all of that to dwindle as I become more stable this year. Thanksfully, people generally avoid asking me for money because they know my situation so I’m not in this much.
April: That’s exactly how I’ve always handled it. Any money lent to friends is ALWAYS thought of as a gift more than a loan. If they pay me back, great. If not, it was money that I was able to gift to them. All my friendships have remained intact due to this.
@18–I didn’t say I only gave the loan because she has a baby, I said she wouldn’t have asked me (or accepted the money if I offered it) if she wasn’t a mother. If it was just her alone in this situation, she would have couch surfed or found another alternative to asking me for money. We’ve been friends long enough that I know that to be a fact.
@20–We do view the money as a gift, but when you loan to friends and relatives, they almost always are going to insist that they’ll pay it back. Rather than saying, “Not likely,” we just said, if you do, fine, but we aren’t expecting it and we won’t ever bring it up.
Last year my parents loaned my wife and I a decent amount of money. We did not ask them to, they offered because they found out how much we had paid in student loan interest and they didn’t want us paying that much. They said to pay them back when we could. We will have them paid back by March of this year.
While we had no problems paying the loan back, I hated owing my parents money. We saved a lot on interest, but knowing that we owed my parents was not a good feeling either.
I lent (attempted to give) my parents $1500 while my dad was in the process of switching jobs and they were having trouble. My mom keeps bringing up their efforts to sell one of their two cars so they can repay me. I wish they’d just forget it – it’s not nearly as much money to me as it is to them.
I feel like I’ve hurt their pride or something. It’s difficult to talk about, which I guess is pretty normal but probably not healthy or useful.
I don’t view covering dinner/a movie as loans, because it’s rarely my only dinner/movie with that person, and it goes back and forth. I DID once have a friend who was honestly quite poor, and had a tendency to say “oh, I’m not hungry, so I’ll just have some of whatever you’re having” and then would eat half of it. Eventually, we had to start being blunt: “Well, I want what I’m having, so please order your own if you want some”. Also, when she asked why she wasn’t invited as much, we were honest: “We love having you around, and will invite you when we can afford it – but we couldn’t afford to pay for you that time, and we know you usually need some help with that.” Suddenly, the money appeared, and she’s much better now.
I don’t know what I would say if my best friend asked me for money today. Many years ago, one did (well, she asked a mutual friend to ask me because she was embarrassed) and she never paid it back. I don’t hold it against her, as it was MANY years ago, but it did make me realize that it’s probably not a good idea because my friends and I feel differently about money. I wouldn’t call anything given to my siblings a loan and I would give them anything I could, but that’s because of who they are as people and who I am… it’s not an approach I would advocate to others without knowing their particular relationships.
I once loaned, not gave, a couple thousand dollars to a family member of mine. We are both around the same age so we grew up together. She was in need of some help financially at one point to get her boyfriends’ car out of the impound. She never asked me for the money but she did present her dilemma to me so I offered. She paid me back in full in about 2-3 weeks. Our relationship is still as strong as ever.
I won’t loan money to friends and family. I will only gift it. I make it clear that it is a gift, and one of my conditions is, it isn’t brought up ever again.
During the first year that my husband and I were dating, he found himself in a financial jam where some old collection accounts were garnishing his paychecks and bank account. This was when I figured out he’d been irresponsible about his finances in the past. I loaned him the money to pay the collections off, took over his finances and put everything in order, and started fixing his credit. Since at that point I was running his financial life, I knew he could pay me back and exactly how much he could afford each month. I told him how much to write me each check for, and he did without hesitating. It was all done in about three months.
This wasn’t money I could have afforded not to be paid back, but I already knew that this was the man I was going to marry (regardless of a need for a good financial education that he had certainly never gotten growing up) and so I never hesitated in this situation. However, if our relationship hadn’t been as strong or if he had been a lesser person I can see how it could have gone very badly for me.
like others , I’ve paid rent for friends who were in real difficulties and like many above, I have always considered such events gifts not, loans. Better for me and better for them. It also helped a lot that there wasn’t an ask, just my offer, and I didn’t say “how much do you think you need?” Of course I don’t know if the money actually went to rent, but I felt that if I bought someone shelter for a month, that’s time to work on other problems…
One friend, when faced with a very big difficulty, did something I found kind of amazing. She wrote a mass mailing, explaining to friends that she was in a particularly bad situation and asking for help. It was a “dear friends” letter and explained that she might not be able to pay people back. I don’t know for sure how much people helped her, but this was a way for her to ask for what she needed without putting anyone in particular in a spot — friends who didn’t have any extra resources at the time didn’t feel as pressured, and a little from a lot of people was easier, I think on all involved.
I have a friend who I’ve known since high school. She moved away for college and when she graduated she stayed in the college town since she liked it there. She lost her job about 2 years ago and had to charge some necessary expenses to her credit card. Eventually, she did find a new job a few months later but when she finally sat down to take a look at how much she would owe, she realized it would come out to over $1000 in interest because of credit card’s 10+% interest rates. She didn’t like the idea of paying back so much in interest so she had half jokingly asked me if I could lend her $7000. She is a smart responsible person and I would trust her with my life so I said yes without a second thought to her surprise. We hashed out a plan where she would pay me back monthly over 2 years with a 5% interest which would only amount to $350 in the end. I didn’t want to make a lot of money just because she had a bit of a financial problem but she insisted to charge her some interest at least. She has been slowly paying me back as planned and we’re only a few months away till it’s all finished. All this hasn’t changed our relationship either as we still hang out when she is in town. We also went on a vacation for a week together a while back so everything worked out.
There are many ways to ruin a relationship, but lending money is one of the fastest and surest ways to do that.
The relationship dynamic changes immediately upon lending money. Before, the independence was equal, the dependence mutual, and the obligation reciprocal.
After the money is lent, the debtor is obligated to lender. No matter how you justify or rationalize the arrangement, nothing changes this fact.
April, you where smart to gift the money without any expectation that it would be repaid.
– Contrarian
My roommates and I regularly lent money to each other in college. We started off rather small lending to each other for party covers and whatnot before we even lived with each other. Over time it, we just kept track of outstanding debt on a common whiteboard in the middle of the apartment. That said we never really went over $100, but it was nice to not have to pay each other all the time whenever we were buying groceries or something. At the end of it all, one of the guys was moving across country and had a few big items he didn’t want to move with him, so we worked out a fair price and settled the debt with items and some money to cover the difference.
However I don’t believe making big loans to friends, it took several years for all of us to build up each others trust in the others credit worthiness.
I have lent money to friends, and in one case everything was fine… in another, things went very sour.
I lent a girl $200, (she bought some items from me on credit) and for a year I would call her once every 2 months or so to ask how things were going and if she had the money. At one point she got pissed off and blocked me on Facebook (I never pressured her, by the way).
A year later, she started working at my company. I’ve tried to say hi and talk to her, but she ignores me completely… kinda hard when you see eachother everyday but what can I do?
I have one friend (kind of like a brother to my wife) who constantly borrows money from us, but never more than $20. He always pays it back on payday. Really, it’s more like a line of credit with him than a loan.
I loaned my own brother $1000 to buy a car a couple years ago and haven’t seen a dime of that money since, but I don’t care. He’s my brother and he will pay me when he does have the money.
Frankly, I can’t fathom people with mindsets like @2. How can you write off your own mother because she’s not good with money?
My parents have never been good money handlers. Always broke. A few years ago, my mother asked me for the cash to buy a good used car she needed to have. I wired her the money knowing that I would never see it again. And I was fine with that fact. Until I heard that my father had allowed the engine to run dry of oil and the engine seized. Typical. They then ‘had to go to the dealership to buy a new car’. smh
A good friend asked me if I was interested in going into business with him by way of buying investment real estate. Having already been disastrously down this road solo, I passed on the offer. The buy-in was $25-50k. I thought long and hard about whether I wanted to lose a friendship over a business deal and decided to keep the friendship! However, he’s got a bit of an attitude now because I didn’t go into business with him and he thinks I don’t trust him. Sometimes you can’t win.
A family member has taken small loans from me and only pays them back after I’ve nagged for promised repayment. This tells me that I’d better be careful about lending larger sums in the future or to just make monetary gifts to this person without hope of ever getting repaid. A large repair bill is on the horizon and I’m just waiting for this person to ask me for money. If so, there will be a clear repayment schedule because I have done enough for this person already. I have my own clear financial goals which I’m never going to achieve if I keep giving out $$$!
My husband and I borrowed some money for part of the then-required 20% down payment on our first house. Daddy said, “Yes, I’ll lend you the money as long as you and I have a legally signed document. I want this to be a business arrangement – separate from our familial relationship. I also want to be certain that if I die before it is paid back, your mother can collect it.” My husband and I really liked this and it worked for us. We paid it off WAY sooner than the contractual requirement.
The main advantage of having a written agreement is that, should it not be repaid, at least it’s a tax deduction.
On the other hand, when my prodigal siblings have asked to borrow money from me, I have asked myself, “Am I willing to GIVE it to them?” If the answer is yes, I “lend” it. If no (and it finally was), then there’s no loan.
I have never loaned more than $20 to a friend, and that was only because they left their $$ at home. I cannot imagine lending to a friend. Not because their not paying it back would ruin my side of the friendship – because it would certainly ruin it from their side. What I will do for friends is try to find ways to help people help themselves.
Here’s where J.D. hopes his family isn’t reading the comments on an entry he didn’t write.
So, I have mixed feelings about lending money to family and friends. If you’ve read my book, you know that I basically subscribe to April’s advice above. I don’t say “never do it”, but I also recognize that it can be a sticky business.
Some real-life examples:
* Kris and I borrowed mother from her grandmother to buy furniture during the mid-1990s. We had a contract, paid interest, and made monthly payments. We got rid of that debt ASAP.
* My brother borrowed $20,000 from my mother to try to save his houses. (Long-time readers are familiar with his financial crisis.) He couldn’t save the houses, and hasn’t been able to repay the loan. He feels shitty about it. But the thing that boggles the minds of everyone else is that at the same time, his wife got a $10,000 boob job. Now, I’m sure that to them, there’s no connection between these two events. They borrowed money to pay for the mortgage, and it’s totally unrelated to the boob job money. But to the rest of the family, it seems like they borrowed money to pay for a boob job, and then weren’t able to repay it. I don’t think anyone is really resentful about all this — my brother will try to pay it back eventually, probably — but we just think it’s crazy. Plus, it makes it so that later, when my brother and his family were in even worse dire straits, none of us would even think of lending them money.
* Kris’s sister borrowed money from us when her condo development had an unexpected maintenance issue. She’s fairly good with money, though, and excellent with debt. Plus, we knew that this was a temporary thing, and that once the homeowners association won their lawsuit (which they did), the money would be repaid in short order (which it was).
* I had another friend ask to borrow $100 once. I could have easily afforded to give him the loan, but I didn’t. He smokes, does pot, and drinks. He complains about his job, and never tries to find extra work to improve his lot. I felt like this was a bad road to go down, so I simply declined the loan. It was awkward for a few minutes, but now there’s no residual resentment. (Well, I don’t think he resents it.)
* I loaned a *large* sum of money to a friend for a business deal. (Well, my business loaned the money to his business.) We have a contract, he pays an interest rate (higher than I could earn in a savings account, lower than he could get elsewhere), and he pays on time every month.
There are certain friends that I would loan money to without hesitation. The last example above — my friend with the business — is one of these. I trust them, have seen their character for many years, and am willing to take the risk.
There are certain friends that I would never loan money to. Again, I’ve seen their actions for many years, know their character, and am not willing to take the risk.
I’ve wanted to write about each of the four instances above on the blog, but haven’t been able to. There’s no way to do it without pissing somebody off. I’m hoping that this comment gets it out of my system without causing undue distress in people’s lives. 🙂
I only do it once. So far, I loaned around $300 to my best friend for a plane ticket (to visit me) – she only paid around $50 back, but we had a fun vacation together, I wrote it off. I loaned $500 to my brother for an apartment – he paid back $200 and keeps “forgetting” the rest, I wrote it off. Finally, I loaned $7,000 to my mother to buy a new car after hers was crashed and the insurance company dithering on paying her. She’s been paying me back plus more.
My rules are:
1. Only loan what I can afford to write off.
2. Only loan if it is what I consider a good reason – it is my money after all.
3. Only loan to a person once – if I don’t get paid back, they never get more than a lunch out from me again.
If they don’t pay me back, it’s ok because of rules 1 & 2 and I don’t treat them differently (other than no more lending). I do try and work out a payment plan though that they can afford – but circumstances change.
I do think that loaning any money that you would need later/that would hurt you is a bad idea and you should NEVER co-sign a loan.
I have personally never loaned money to a friend or family member. However, when I was in college, my boyfriend at the time lent his sister 13K to pay for her wedding. He put together a very meticulous contract including interest rate and repayment schedule. His sister agreed to the terms in the contract and signed. To this day, she has yet to pay back even 1K of the debt, and nearly 6 years has passed. Now she has two young children (one with a major heart defect), a mortgage, and only one income stream (she stays at home with the kids while her husband works). While losing this money did not cripple my boyfriend (even while in college), 13K is quite a lot to lose forever. Its difficult to make hard and fast rules about loaning money to friends and family. But if ever approached, I would strongly consider this story before loaning or gifting anything.
I never loan money to friends or family.
My husband and I make it a habit to give gifts rather than lend money to those closest to us. We make significantly more than anyone in our family and live on a small percentage of it. We’ve covered rent for someone, paid another’s overdue bills, bought one person work equipment, we’ve even contributed 20K toward the purchase of someone’s home.
In each case, the relationship has been made stronger. In some cases, it’s even encouraged the person the act more responsibly. We make it clear that we wouldn’t help them if we didn’t believe that they’d make great use of a fresh start. It has worked really well for us, but I think only because the amount of money was worth seeing the person have the chance to succeed.
I have loaned money while in graduate school. I did that based on emotional reason and not thinking things through. I “suppposedly” gave $1000 to help with the tuition of another friend, but he dropped out and never returned the money. It hurt, esp. as I was so poor. Lesson learned.
Now I have loaned money to relatives and friends after that too. But I have some rules now –
1) Never risk more than I can afford to lose – there are no loans, just gifts.
2) Never touch my emergency fund/retirement to give the loan (there was one situation that I broke this, but I thought it through at that time and it was worth my emergency fund)
3) Always, always involve your spouse/partner
4) Don’t be an enabler. I know I shouldn’t judge but when it comes to a loan, everything is open. If a friend asks me money for gambling, I am going to refuse it and try to help in other ways if I can.
5) Consider the impact it will have on others. I don’t want to be known as a loser who gives money whenever anyone feels like having free money.
6) We have a separate gift fund now that has not been touched but if we feel like helping someone (even if they don’t ask) it comes from this fund.
We (and I use the term loosely) have lent far too much money to “friends” (also using that term loosely) over the years. We’re out at least $18K and will probably never see any of it back. The biggest single chunk was $10K to my husband’s longest and bestest friend. This guy was a financial analyst for Merrill Lynch, had a huge f-ing salary then quit for a more laid back life, but he and his wife kept spending like the salary was still there. And they put 3 kids through college with no loan-taking, wherever the kids wanted to go. Now he’s way behind on their mortgage, hoping to renegotiate something, etc etc. The $10K he begged us to lend him was just to get cc creditors off his back; he even needed us to overnight the $10K to him, he was in such hot water with one credit card company. And he set his own repayment plan — any amount he wanted to send us each month, no interest, for as long as it takes to repay the initial $10K. What great terms, huh? And he can’t even stick to those terms – rather than sending $5/mo, which would at least be what he agreed to, he just doesn’t send anything except emails about all the great crap he’s buying on ebay all the time.
At the beginning I said I was using term “we” loosely and that’s because I never in a million years would have made a loan like this or any of the others my husband has made, he of the “you can’t take it with you!” thinking. When he and I were on the precipice of divorce this past summer, I was insisting that part of the settlement was he would be paying me that $10K (since it was all from my inheritance to begin with, not any co-mingled assets) and then he could spend the rest of *his* life waiting for his friend to pay it back. Now he and I aren’t getting a divorce, and frankly I don’t suppose I’ll ever see that $10K again. And it makes me sick.
So I say simply, Don’t. Give what you’re okay with giving, but don’t ever loan money, and don’t expect your spouse to just be okay with what you think is okay to lend.
I have loaned money to one of my children, and have been disappointed with their attempts to pay it back. When I’ve tried to remind them about the payments, they’ve gone defensive on me and claimed I was riding her backside! Yes, that was a frustrating day.
It’s not an all bad thing though. When I originally loaned the money, I told the kid that if they did a good job paying it back, I’d consider co-signing for a loan in the future. It’s very clear that’s not happening, so at least I’ve saved myself larger troubles!
I loaned my brother a couple hundred dollars recently. I was wary about this because when we were younger, I don’t think he would have paid me back. I told him this, and we discussed that I do think he’s more mature now, and I gave him an explicit date by which to pay me back. When that date came up, he asked me for an extension, which I gave him, and he did pay me back by the extended date. So that worked out well, really, and helped me rebuild lost trust in my brother. I had been prepared to lose that money but it was worth it just to try and be helpful.
My father once asked to borrow $15,000 from me, but I simply couldn’t make the loan. I would have wiped out all the savings I had. I had to tell him no. I totally believe he would have paid me back, but he found another solution to his problem that worked just as well.
I also borrowed some money from a friend and co-worker once. I think it was $500. I offered him something like 10% interest on a 3-day loan, because I didn’t have much in my checking account and I couldn’t transfer money from my savings account at another bank to my checking that quickly. I paid him back, with interest, just like I said.
So mostly, this sort of thing has worked out for me. I think it’s worth the risk of a loss (especially for the smaller amounts) to try and help out the people that you care about. Maybe you lose some money, but you’ll end up OK. Just don’t loan so much that you put your own finances in jeopardy.
I enjoyed this read very much and I agree with thinking of the loan as a gift right away…BUT, later, when they are in a better financial situation, is it ok to ask about the money? or since you have accepted it as a gift do you let them repay on their own terms?
I loaned money to a sibling while I was in college (a few thousand dollars). It was for a down payment on a new car, and I was buying the old one. The agreement was they would give me 100 shares of stock of the company they worked for once the loan for it was paid off. 2 or 3 years later, I received 122 shares. The stock had split in the meantime and then the price per share had increased. I received the exact amount I had loaned (in stock), but I was expecting 200 shares. Like I said, I was in college and they were working full-time. It still rankles a little, but I don’t bring it up because I don’t want to sever the relationship.
After that I decided not to loan money to family again. Or get everything in writing.
We went through this recently when relatives of ours asked for $5k to buy their first home. We didn’t think the home was a good idea (it cost 5 times their meager annual salary, among other reasons) and we only had $2k in savings to begin with. OTOH, they are family, and family is supposed to help each other out.
We ended up offering our $2k as a gift, which they *insisted* they would pay back as soon as they could. We said that was fine, but we didn’t expect it. However, when they got their $8k tax credit for buying their first home, they proceeded to buy a giant-a** TV with it rather than pay back our “gift”. I know that shouldn’t bother me, and I don’t need the money back, but something doesn’t feel right when they had to beg for their down payment but blow windfall money as soon as they get it.
I wish we had said ‘no’ in the first place.
The last time (okay the only time) I actually enforced the payback of a loan was when my sister asked me to co-sign a loan to pay off her credit cards. I said no, but that I’d loan her the money to pay off her highest interest card. The caveat was that she had to pay me back on a monthly basis (no interest, but it was more of a money management exercise if anything). She did, though it took a little hounding. I don’t suggest that, though, unless you have a REALLY good relationship and the person understand exactly what is to happen. I can see how horrible it can get in general.
I also think it’s best to lend money as a gift instead of expecting to get the money back. When I was in college, I didn’t have a lot of money but I had some saved. My sister was distraught and asked me for money. I gave it to her. She ‘borrowed’ money from other family members also. I wouldn’t loan her money again, but it doesn’t strain our relationship because although I never told her it was a gift, I didn’t expect her to pay me back.
My then boyfriend was unable to get his loan to go through for a semester while we were in college. He didn’t ask me, but I paid for the semester because he would be the first to graduate college in his family and I knew how much it would mean to him. He didn’t pay me back all of the money, but he’s my husband now and I think he’s probably paid it back several times over in our relationship.
They were definitely learning lessons. I wouldn’t lend money that I couldn’t afford to lose.
I borrowed $11k from my parents when I got out of college and lost my first job. I kept ignoring the collections letters until the phone calls got to be too much. I started off paying $300/mo, but it got to be too much. Fast forward a few years, and dad says that as long as I pay him something small every month, he’s happy. (I do pay him.) He did tell me that right now, he doesn’t really care, but there may become a point where he does and I need to be ready for it. Which I’m fine with. The thing is, I owe $85k in student loan debt, and he’s cosigned on some of it, so I think he’s happy that I’m taking care of that.
The kicker is, now I’m prepared to be a lender (or not, actually.) I recently got married, and one thing I’ve noticed from a mile away is that my wife’s family is simply not. good. with. money. For instance, my brother-in-law almost got evicted, and just had his jeep repo’d. He writes a fat child support check every month (and I’d have some sympathy for him) but he spends every night at the bar. Oh, and his license got suspended because he didn’t pay his insurance.
When we got married, I made it clear to my wife that because of my student loan debt, the fact we had to pretty much pay for our own wedding, and our dreams to buy a house at some point, her family can ask for money but the answer will be “no” for the foreseeable future.
I agree with what is said in this article, but I think it is still a good idea to have a contract of some type. I have lent money to a relative before without a contract, and it didn’t work out too well. A contract states the terms of the loan, and any consequences to non-payment if needed. A payment schedule is another good thing to have. I do treat most loans as gifts, so I am never too hurt if I am not paid back.
My bf and I were besties before we started dating, he loaned me $600 to pay off my credit card debt which is the only debt I’ve had in my life. I paid him back over the course of a few months. We were still friends and eventually started dating.
If you care about the person you will pay them back, its that simple and easy.
Virgin Money from billionaire Richard Branson used to offer a solution, where they handled the loan payments and collections, so that people could loan each other money, but not have to deal with the negative side of loaning money to friends. But it looks like VM in the U.S. closed down. Virgin Money is still operating in the U.K., Australia and South Africa
Struggling with this right now. I have several thousand dollars out in personal loans, some of which may never come back. I’d decided to shut down the bank — and then an old friend contacted me in a panic, needing a big chunk of money or her car would be repossessed.
No car = no way to get to work (she lives in a rural area). In other words, she’d lose her job.
I wired her the cash. The last time I lent her money, several years ago, she did pay it back with weekly checks.
I know that I need to tend my own yard but I could not stand by and see a friend lose her livelihood. They’re already on the edge; if she lost her job they would lose their house for sure.
I believe she will pay me back. Maybe it will take a lot of small, weekly checks, but I believe I will see the money one day.
Good article. I have one thing to add: make sure that you (the lender) have the proper mentality for lending money. If it is going to bother you seeing the person you loaned money to eating out at restaurants or shopping for TVs while not paying you back (or not paying you back quickly enough), then you shouldn’t make the loan. I’m speaking from experience here.
I have a sibling that’s horrible with money and used to constantly ask for “loans”. I’d cut her off, but after she had children I felt bad about it so I loaned her some money. When her student loan refund came in she went out and bought all kinds of stuff and never made a peep about paying me back. It thought to myself, “the reason she has a cool IPOD and new clothes and whatnot is because I’m basically bankrolling it.” So I got out of the loan business with her.
I also have a friend that I loaned money to that is good at repayment, but always claims to be “broke” as he buys the latest XBox 360 game. Doesn’t bother me as much because he pays promptly and doesn’t let his obsession with games and whatnot get in the way of paying me back. I also don’t see him as often. (There is a written and notarized agreement on the loan, so that helps, I think.)
Really, if I don’t like the person’s spending habits, or I think I’ll have to nag them to get repaid (they didn’t have to nag me to loan them the money) I usually say I can’t do it. It’s not worth the hassle.
Hey JD, did you ever figure out if you still owed your cousin that rent money? This article made me think of that.
@84 David: I am really curious as to why Virgin Money closed down. Anyone know? Did it have something to do with the default rate?
My husband co-signed a car loan for his sister many years ago. (I don’t think he even understood what it meant). She trashed his credit. Later she asked for a loan, I don’t know what for. We were in debt repayment mode at that point and I’d read about only “loaning” what you’d afford to give away. I let my husband give her $50. She actually paid it back. Doesn’t mean I’d EVER lend to her again! She, somehow, got my MIL to co-sign another car after we declined. Now my MIL pays for the car payment and insurance. (I’ve got her on a fast repayment schedule). But, when someone should be putting their money in retirement it’s kind of frustrating to see!
I’m kind of cheap I guess. Always have been since I was a kid. Probably comes from being an only child–very selfish. I don’t buy people’s meals when we eat out. Why bother “trading” meals out? Everyone can just pay their share each time.
@87 Ash. Great question about why Virgin Money is no longer available in the U.S. Virgin Money is still operating in the U.K., Australia and South Africa
When I was in my early 20’s a friend from high school moved to the same town I was now living in (800 miles away from our family homes). This was the first time she had really been truly on her own and it turns out that she was TERRIBLE at managing her money…well, her life in general really. She got a good job but it entailed primarily working from home and without direct supervision most of the time. She was fired from that job rather quickly (because she never did anything…some people really just need to be supervised). Anyway, she did find work but she was ALWAYS short on money. She lost her bank account because she bounced so many checks they closed it. She called me one day at work and asked me to loan her $50 to get her to her next pay check. I had the money and could have afforded to lose it but I knew if I agreed to it that it would become a weekly call and the numbers would get bigger and bigger. So, I said I didn’t have it. Less than 24 hours later I was in a position to hire some temporary workers for a couple of days to help assemble a direct mail project we had at work. I knew my friend worked evenings so she was free during the day and clearly she needed the money. Win-win right? Well, she said no and gave a really, really transparently lame excuse. Ended up just making me feel like I made the right decision not to loan her money. BTW – we are still friends to this day close to 20 years later.
What about loans that benefit both parties? My parents lent my husband and I 97k in January 2010 to pay off our mortgage. We agreed on a 3.4% interest rate, which was more than they could get in a money market or short-term CD (where they were planning to put the money), but significantly less than the interest rate we were paying on our mortgage, even with the mortgage interest tax deduction. We have paid off half the loan so far and hope to have the rest paid off by the end of 2011. I would much rather pay my parents interest than the bank. It really was a great deal for both of us, but only because all parties involved are financially savvy.
Great topic, great comments. Love this community even when we fight.
This article is supposed to be about friends but I notice most of the commenters are bringing up stories about relatives (especially siblings such as J.D.’s story with his brother). Do the rules change for siblings or relatives versus friends?
I think April has the right idea in any case: clear it with any spouse/partner first, don’t expect to be paid back, and only lend what you can afford to lose. And if you feel like the person is a perpetual train wreck, you may be doing more harm than good by lending them money instead of letting them face the consequences of poor choices.
I gave my sister money a long time ago. She wasn’t asking for a loan, and I fully intended that it be a gift and not repaid (and it wasn’t, and I was and am fine with that). I’d gotten some bonus or other at work, something like 2k, and I gave her most of it. She was struggling with low pay and it felt good to be able to help her out. She was able to use it to get out of a tight spot, and years later she paid it forward by giving a friend some money when SHE was in a tight spot.
In another instance I did loan a friend money, and he repaid me promptly. We were both nervous about it, not wanting to risk a friendship of 15+ years, and are both relieved it came out okay. In that case I also was able to absorb the loss if necessary, but it was more a case of helping make ends meet until a check was issued from his employer.
Given both cases, I’d far rather be able to give the money and not expect or need it back.
I’ve never been asked for money, but I have borrowed $10K from my parents to help with my downpayment on my first place. My wife (then girlfriend) paid them off in about 2 years (~$400/month).
My wife and I just bought our second place (in Australia) and had to borrow about $20K from her parents to help with the costs there.
Both sets of parents didn’t mind helping because my wife and I are both responsible and good with money.
When I was in my twenties, I got a sum of money from a car accident. I loaned it to my father for a business he had started. He paid me a higher rate of interest than I could have earned at the bank but lower than what he would have paid. The loan also made sure that I didn’t fritter the money away because I was young and not used to having such a large sum and I had it to buy a house when I got married. It was just as much a favor to me as it was to him. Now he and my mom are returning the favor by loaning my husband and I so that we could put new siding on a house we just bought sooner than later. We are paying them a higher rate of interest than they can earn in a CD but lower than we would pay from an equity loan. I could trust them because of growing up and seeing how they handled their money and they can trust me because of watching how my husband and I handle our money. I did have a written contract with them when I loaned them money and they have a written contract with us. I have no expectation that this money should be a gift or that they owe me an inheritance precluding me from paying them back. But when my husband’s brother had asked us for money a long time ago for a business he had, we declined because he didn’t show that he had any equity of his own in the business in the financial statements he shared. We felt that if he didn’t have any of his own money in the business, we couldn’t trust he would prioritize our loan. We weren’t in a position at that time to just give a gift.
@Genevieve:
“My parents lent my husband and I 97k in January 2010 to pay off our mortgage. We agreed on a 3.4% interest rate, which was more than they could get in a money market or short-term CD”
That’s because it’s a lot riskier than a money market or CD.
Your parents are getting the short end of the stick here. They’re exposed to more risk than they think, but they’re not getting appropriately reimbursed for it. You’re shortchanging them the risk premium they deserve, in order to obtain a below market rate loan, given the risk you represent. It’s probably not even secured against your house, is it? In what world can you get a $97k unsecured loan at 3.4%? A world where familial ties trump market forces, that’s where.
I don’t mean this as a condemnation of your credit-worthiness. I’m simply pointing out that the market is very efficient at appropriately pricing risk, and you’re using your parents to circumvent that mechanism, at their expense.
My parents were generous enough to loan me about $10K to buy a nice grand piano (I teach and occasionaly perform). I was originally going to get a loan through the bank but they were worried that if I had that debt that I wouldn’t have been able to get an auto loan (I was due to get a new(used) car within the next couple of years). They offered to loan me the money and we sat down and drew up a contract together after agreeing upon a manageable monthly payment. I’m one of those people who HATES owing other people money so there is just no way that I’d default on this loan. In fact, I have plans to pay it off early. I’m so grateful for their generosity. Of course, they also instilled in me a good foundation for healthy spending and saving. The only person I’ve really loaned money to is my significant other and we’re working on taking care of that and getting more organized.
I am uncomfortable with the assumption that some commenters are making that people who borrow money from friends must be irresponsible and feckless. We all know people who are, but in my case (I posted one of the earlier comments on this thread) my father died, leaving no savings, leaving me responsible for my mother, who then became disabled, which involved me having to spend money on various expensive disability aids such as special beds and chairs, modifications to the structure of the house to make it usable for her. At the time, I was self employed in a field that was reasonably remunerated but diminishing due to government cuts. At first I had to take time off to care for her because she was massively resistant to being cared for by a third party and we could not afford to do so anyway. Being self employed was a blessing in the sense that I could be flexible with my time, but the net result of all of this was that our savings were wiped out. I cut our outgoings considerably, quite harshly, and also changed field to earn more money (again, being self employed is a blessing in that respect). It took a year for my earnings to increase because of the way in which payment works in my field, and in that time we had no choice but to borrow to some extent to survive. It was during that time that I gratefully accepted my friend’s offer of a loan.
I am now in full debt snowball mode and finally earning enough to comfortably take care of my mother and I. I am very lucky. But before that, we were spectacularly unlucky, and that is why we ended up in the position that we did, which both of us found incredibly frightening and humiliating. It does not help to read things like
“sadly, no one who knows how to handle money ever needs to borrow from friends”
as one poster wrote on this thread. That is simply not true. I hope that the person who wrote that comment never has his legs cut from under him in the way that we did.
I loaned a close friend a 1000 a year a so ago – she’d just gotten out of a bad relationship, was only working part-time and would have been reduced to living in her car – so I gave her money for a deposit/first month’s rent. And made it very clear that I don’t expect to be paid back at any particular time, that it was about her safety and happiness and if she couldn’t ever pay me back that was fine. And those first few weeks I sent a couple of gifts of groceries to her place as well.
It’s not an insigificant amount of money for me – I didn’t dip into my own emergency fund but decided to put off buying a new computer – but I don’t regret an instant of it.
But I do agree that the only way to be truly ok if you loan money is if you can let it go, mentally – if either of you are worried about repaying it, it can stress the relationship.
I agree with J.D. – some friends should not be loaned to.
I was young, I had a large income, good savings, and a friend in despair. In 2002 I lent him $17,000. I had never heard about the concept of considering loans a gift and not to expect repayment. I fully expected repayment.
I didn’t need the money for a couple of years and the loan was never mentioned between me and my friend. Then, in 2007 some hardship fell on my family and although we got by, the extra money lent and not repaid would have made our situation much, much easier. Note, that the money had not been brought up by my friend in 5 years, while I had cautiously asked about repayment.
My friend did not respond well to these questions. First off, *I* felt very awkward asking for my money back. I knew I shouldn’t, but I felt ashamed (of all things!). He didn’t. At all. For a full year we went through the ‘I will pay next month’ and nothing happened cycle. And while we were budgeting very hard, restricting our spending and trying to save as much as we could, my friend lived the high life: he had a lush birthday party, ate out every day, took taxis to visit us and went on vacations! It was very hard restricting ourselves while feeling at the same time that he was enjoying the luxuries we were deprived of with the money that we should be rightfully spending, if he only paid it back. I had a big fallout with this friend and our friendship was ruined. Still, I didn’t want to give up on the money, and when he was in town late 2008, I invited him over for dinner (we couldn’t afford to go out, but he arrived in a cab). We spent a very fun evening as the friends we used to be, and somehow this was the turning point in his attitude. A couple of weeks later I asked to make the arrangement to pay back a small amount every month, say $50 or $100. Just *something* to show his honest effort to try to repay me.
Ever since 2009, he has been paying about $150 a month, sometimes a larger sum. When payments stop, I don’t hesitate to ask him. I don’t feel weird about it, I am polite and even thank him for the payments (the irony …). By now he has paid back about %25 of a loan I made 9 years ago. I am wiser. I will never ‘lend’ money to anyone again, I will either make a gift or not.
I learned that someone who has to ask a friend for that amount of money, is likely to have exhausted all other sources for borrowing money and is probably the worst possible borrower of your money. I have learned that it takes an additional toll on you when you are hit by a hardship and your friend doesn’t see the same urgency to help you, that once you saw to help him (e.g. by saving the taxi money and sending it to you, getting a regular job etc.). I also learned that this particular friend had borrowed money from very many of our mutual friends, but nobody spoke about it, to save *him* the embarrassment. *We* lenders were embarrassed to talk about him! If we had talked to each other, several of us might have been warned and chosen not to feed any more money to this black hole.
A very expensive lesson learned. As it is right now, I request payments about every other month. If they happen, I am excited, thank him and treat them like a windfall. I don’t consider this person a friend anymore, but am able to socialize with him about once a year. He still has the power to choose whom he repays or not, but for now I’m glad it’s me 🙂
I have been somewhat on both sides of the fence…I worked for 3 years between highschool and going to college, and had the ability to informally lend some immediate family members emergency funds. There are a few people that I would give money to, and a few that I would not–I knew their spending habits, and so always got paid back as expected.
Fast forward a few years, and I was at a new (so not yet accredited), small, private Catholic university across the country…the economy crashed (I arrived in fall 2007), and so I was “stuck” without a part-time job that I was counting on, very little financial aid, and most banks not willing to give loans.
Fortunately, I was able to get as much as I needed with a co-signer. However, my (now) husband who also went to the same school was unable to pay for the last two quarters of school. After much prayer and discernment, he asked an uncle who had some means to co-sign a loan for him; instead, the uncle decided to loan him the money for a much lower interest rate than we would have been able to get elsewhere.
Even though we lived very frugally (still do…), and graduated in three full years by taking a full course load over summer quarters, we have a high debt-load coming out of school. Neither of us were able to get a part-time job (with small temporary exceptions) for the entire time of our schooling. However, now that we have graduated, married (<$4000 wedding), and are working, we are able to start paying loans off. We have been blessed with a couple of windfalls, as well as the ability to squeeze in an extra payment each month. Although it would make more financial sense to pay off higher interest loans first, we are paying off the loan from family. Right now we are on track to paying it off in less than 2-5 years instead of 10.
From either side of the "fence," I think there should be an honest assessment of the situation and the trustworthiness of the person. If you are lending, it is common sense not to lend outside of your means; if you are borrowing, it is also common sense to honestly assess your situation. And always, on both ends, be true to one's word.
Posted earlier but noticing in a lot of the comments tax laws are being broken. People probably don’t know they’re doing it. If you earn interest you’re supposed to report it on your taxes. If you pay interest and it’s for your primary residence (I believe that even if it’s below market) you can deduct it. A lot of the transactions spoken of in this post are probably under the table. Also, if there is no written loan document it’s really a gift. If the gift is greater than $13,000 (I think) from one person to another (can escape this by having a check from one parent to one child, a check from one parent to child in law, a check from other parent to child and check from other parent to child in law) it’s taxable to the giver.
@Kevin
I disagree that my parents are getting the short end of the stick. They are getting approximately 2-3x the interest rate they would get in a CD. They know we have high income, high job security and no other debt. Our credit scores are well over 800. There is no way we would not repay them unless we both died and then they would get significantly more than the debt from our estate anyway. I’d say they are making out very well with this loan.
I have loaned a friend of my $1000 on two separate occasions and was paid back both times.
Nonetheless, I don’t want to loan him any more. He is working on an advanced degree and is taking out massive amounts of loans to do so. Whatever money I lend him, he’s paying me back using his student loan checks when they come in. He’s buying plane tickets with his student loans, as well, and taking advantage of overseas programs which are costly, rather than just staying put and finishing his degree (his colleagues who also go abroad for these programs are all trust fund kids who aren’t paying their way on loans).
I suppose I am judging his actions, however, I am currently paying down my husband’s students loans (about 50K) and it takes two decent incomes to do so. This friend of mine is facing a bleak job market and he keeps talking about dropping out of school and not working in this particular field that’s he’s already invested much money into, racking up what I fear could easily be several hundred thousand dollars in loans. I feel that loaning him money isn’t helping him, overall.
#19 Mike (and #93 Genevieve) – we did this. When my mom received the proceeds from my dad’s life insurance policy, she actually approached us about ‘investing’ in our mortgage. She is very risk adverse and would not be comfortable investing in stocks or funds. She ultimately loaned us $30K at 4% interest for 20 years, and we paid down a large portion of our mortgage (she actually sent the check directly to our mortgage company). We have a loan document signed by all of us, and a payment schedule attached to the document. The monthly payments are on autopay (I don’t even have to think about it other than seeing that the payment was sent every month). There’s no awkwardness.
She admits that she would not have made the same offer to either of my younger siblings (although it’s a moot point since neither of them have mortgages anyways). I suppose you could say I’m the “good” child. She knows that the monthly payment on our loan to her is tiny in comparison with our incomes (it’s about 2.5% of our budget). Since it’s serving as an investment for her, we actually agreed that we would NOT pay it off early, and so there’s no resentment when we take a vacation “instead” of paying our loan back faster.
#102 Amanda – she reports the interest as income on her taxes. We do not deduct the interest because it’s an unsecured loan (in order to secure the loan, it has to be notarized and filed with the county, etc – costs money and time and hassle). So the IRS is actually winning a little extra from our situation.
On the flip side, I only ‘gift’ small amounts of money to my siblings (between the two they probably owe me about $180 right now) with no expectation of repayment, even though they say they will pay me back. I can also count on one hand the friends I would loan/give money to.
The two times a gave money to people to help them in a “bind”, they repaid me with buying an expensive present for themselves soon after. It broke my heart both times.
I was trying to buy my first house, and ran into some expenses I was not expecting.. (now I plan extra for buying)..
Out of desperation, since i needed to close in 2 weeks to keep the house, I called my little brother, who was single, and had a decent job, and asked if I could borrow $4000 for 2 months.. I needed $1000 for costs, and the rest to sit in the account and look good for the underwriters. He deposited the money in my account the next day.
Later, the bank wanted a statement that it was a gift, not a loan. I mentioned it to my mom, and she told me that my brother didn’t have any money when I asked, but left work early, went to the bank, and got a $4,000 personal loan in his name, and deposited it in my account.
I’m a grown man.. but I just about cried at that.. And insisted, absolutely insisted, that he accept an additional $500 on top of what he owed me..
I am pretty tough when it comes to loaning money. If i am pretty sure it is on a “lost cause” – someone who asks every other week and bounces from person to person – then i flat out say i don’t have it. “I use debit or credit only – sorry no cash”. I make up sob stories that i have a lot of loans to pay each month myself and try to get the person to almost feel sorry for me.
For family or very close friends I agree, loan what you can lose without getting angry. If it comes back it’s a pleasant surprise. I disagree though, that the relationship stay’s the same if you are not paid back. It will always hang above you until some resolution occurs.
Plus in some cases the person may ask you a second time for a loan if you forgive the first loss. What do you do then? You say no, your out the money and now the relationship suffers anyway…
Never co-sign either, that is even worse. A disaster that can hang on your neck for years.
Ah, such a touchy topic. Many do not think about how to go about doing this. Many hesitantly do so, and sometimes due to pressure.
But the 3 suggestions listed in the post are good ones. I hope many will follow them.
I personally just find it easier not to lend large amounts of money. People already know me as a frugal person, so they don’t even bother asking. But between friends, $5 here and there is a-ok. And since I don’t lend money, I usually just gift money to those who I feel really need it.
I’m always there to help, but you can’t help those who don’t help themselves.
I’ve both borrowed and loaned, and I’ve also sold things to friends as “pay me later”. It wasn’t until I read Dave Ramsey that I realized how much strain this puts on relationships.
Some friends bought some professional equipment from me and wouldn’t pay while we were under financial strain, so we had to start pushing and things got a bit tense but luckily they were able to pay soon and things went back to normal. This was a business to business transaction, but because of the existing friendship things got awkward.
Another couple we know bought a used bed from us and owed us a balance for it. While there was no rush in getting paid from them and we would have bartered for work, they suddenly became harder to reach– not a good thing because we don’t even care anymore, but I imagine in the back of their heads they might feel guilty.
Also, during some period of difficulties my wife borrowed money from her father– she felt horrible until we were able to pay back.
Bottom line is: gifts are nice, loans are bad news.
@El Nerdo – yup. Dave’s line about Thanksgiving dinner not tasting the same got ya huh? There’s a lot of truth to it in most families.
I just don’t want to be the slave or the lender.
I’ve never been on the borrowing or the lending end of a loan between friends or family, but it seems to me that the first (and really, the only) rule in matters like this is: Communicate – clearly, honestly, and unambiguously – about what your expectations are. April’s point #2 – saying “I don’t expect you to pay me back, but if you want to, it’d be nice” – seems like exactly the wrong thing to do. That might work if you’re lending somebody $10 to cover lunch, but when you’re talking hundreds or thousands of dollars? Think about how that would feel from the borrower’s point of view. Are they really going to go through all the work of saving up that much money because “it’d be nice”?
I think you need to pick one: Either “This is a gift, and I don’t expect and won’t accept repayment,” or “This is a loan, and these are the terms.” (If you want to explicitly convert the loan into a gift at a later date, that’s also an option.) Then, if you’re making a loan, also communicate about how you expect to be repaid: all at once? a bit at a time? What happens if the borrower can’t make the payments as agreed? And what happens if the borrower gets an unexpected windfall – should he keep paying as agreed, or should he pay more?
In December, 2009, I offered to and loaned $10,000 to my sister at 4% simple interest amortized over 1 year for a new AC unit. She just made the last payment to us in December, 2010. We have done this a couple of times and we always, always pay back with interest. I don’t loan money to anyone who is not related to me by blood (parents or sister as I have no kids), and I don’t “gift” money. Maybe people know how tight I am with money, I don’t know.
I have both borrowed and lent money in the past but would probably not do it again. Too much risk. My dad stupidly co-signed on my irresponsible cousin’s student loan and she trashed his credit and left him to pay the $18,000 she owed. He can easily afford it and I don’t feel too sorry for him because it was a stupid mistake (she asked me first and I turned her down cold), but I can tell you I don’t ever want to see that cousin again.
Johanna – I completely agree. I think a lot of the problems in loaning money arise not out of the lender-borrower relationship per se, but out of a failure to explicitly communicate and agree on expectations. You’ve summed it up very nicely. I do agree with April’s point in a way though – if you are lending money to a family member or friend, I think that you should be prepared up front (in your head) for the possibility that they won’t pay you back – and if you can’t afford that possibility either financially or emotionally, then you shouldn’t lend the money.
The document is not necessarily providing a means of recourse, but rather ensuring everyone is on the same page in terms of repayment. I don’t think there would be anything worse than borrowing money and being told “pay me back if you want” or “just pay whatever you can” – like you said, that might work for $20 bucks or so but for larger sums it’s just asking for trouble.
@ #113 Melyssa – Yes, we were reading Ramsey as we were dealing with these situations, and then we realized there’s no “right” way to lend or borrow between friends and family. It was a “doh!” moment (one could say “lightbulb” but when I realize I’ve been doing stupid stuff i’s more of a “doh!”). And that includes purchases– buy today, pay today so I don’t have to hound you 🙂
Now, there are some commenters here who have had good luck paying back or getting paid back– but I would say that’s the exception rather than the rule. Just look at some old episodes of “Judge Judy”, ha ha ha.
ps- a quick google turned out this:
http://www.youtube.com/watch?v=QJxMNzzx3vE
http://www.youtube.com/watch?v=MmCFKEYuzPs
hilarious!
Fortunately, I haven’t yet been put in this situation. It would be a difficult call for my wife and I. It would depend on the situation, who the friend was, and what our own financial situation was at the time. It’s definitely not a foregone conclusion.
@100 Anonymous: It’s not that people are deadbeats or fickle or irresponsible to get into the sort of situation where they have to borrow money. There’s also the can it truly be repaid part. If I look from the outside at a situation that seems like it can’t really improve enough to repay the money asked for, I may be able to gift some money and help in other ways (bringing by groceries, sitting with a parent so that the caretaker can get a break, connect that person with different agencies that might be more able to help, etc). But, I can’t loan money I can’t afford to lose.
That’s one of those instances where throwing money at a problem may help, but it might not be the best thing to do.
#19 Mike. Stand on your own feet and leave your parents out of any loan situation!
Yes, I’ve been on both ends. I borrowed money from my father a few times, and he co-signed a school loan (that I paid back). When I borrowed money, I got a promissory note form, filled it out, signed it, and sent it to him and paid him back with interest, which was always under a bank loan rate, but always higher than his savings rate. The Bank of Dad worked for me.
After being burned as the Bank of Mom several times, I started just giving the money as a gift because of the bad feelings I got when the loan wasn’t repaid. Now I just say no because I think my greatest gift to my kids is my ability to support myself until my death.
My husbands cousin had the nerve to ask us for $10,000 so they don’t loose their home. I feel bad that they might loose the house, but they are upside down on the value about $200,000+ and it is because when he divorced his first wife he refinaced all that money out to give to her. Now we loaned them money once before only a couple hundred and it took about a year before we were all paid back, when it was supposed to be about 2 months. So how do we know they can pay us back $10,000? How do we know they won’t get behind on their house payments again and wind up in the position of losing their house again. Just because my husband works hard and we are financially responsible, don’t blow our money like they have, and we have emergency money in bank and money to invest somewhere, why does family think that they are entitled to it.
I’ve borrowed money from my parents many times. After I bought my first house, I got carried away with improvements and needed to borrow my 1st house payment from them. Last year we got an offer to consolidate debit at 0% interest. We needed to borrow $20k to pay off the balance to turn around and add it back again at 0% interest.
My parents have always been paid back by the agreed upon due date. I remember my grandparents helping out my parents in the early 70s when they had 7 kids to support. It’s just the way generations help out each other to get a good start financially.
When my children are grown I will help them out too. Hopefully they will have the same sense of obligation and duty I have towards my parents.
I lent my sister money once. I didn’t do it very well though. I was only 19 and she was 23. I gave her my bank card thinking she’d take $100 but she ended up taking $300. I didn’t need the money but I really wish I had taken the money out for her. Had I known about how irresponsible she was with her lifestyle I never would have given her the money at all. She still owes me $50 12 years later.
Other than that I never loan money. I’ve never been asked either. This sister still has money problems even though her and her husband both have good jobs. They are just irresponsible. They have asked my other sister for money, but they leave me alone.
I prefer not lending money, because I hate asking to be repaid. I feel it is the other person’s responsibility. Despite that statement, I have loaned 100s to thousands to close family members and have not any problem.
When we were in our early 20s, the husband and I got an email from a “close” friend in her 50’s with 3 kids about our age saying she was in some sort of dire financial trouble, and desperately needed to raise $11K. We were doing well at the time (I’d just landed my first job making more than $100K), and decided that we could afford to “lose” $2500 in a “loan” to her. We never told her we saw it that way, and she promised to pay it back within a year, even writing us an IOU (which we eventually lost, this is how unlikely we thought repayment was).
We immediately lost contact with her, and about a year later, when my fancy contract job had wrapped up and we could have used the money, we sent her a short, pleasant email asking how she was doing (not mentioning the money). She never responded, and that’s that. She could easily contact us, but we’ll never hear from her again.
We’re back to earning quite a lot of money, and $2500 comes and goes pretty easily these days, but I’ve still never lost that little twinge of “gee, it’d be nice to have an extra $2500 for…” No one has asked us for money since then, but I know the day will come eventually, and we’ll remember this experience.
On the recipient end here.
We bought a house with a basement that needed to be refinished (minor water damage).
Out of the blue my dad offered us a gift/loan. He loaned us $40,000 to refinish the basement on the condition that we pay the money back when we sell the house.
It’s interest free, so I consider that 5% or whatever to be a gift, but the $40,000 we will be paying back.
Even though $40k is a huge amount of money, it’s not awkward because of the relationship I have with my dad and because we have a plan to pay it back.
My husband and I just bought a house and both borrowed from and were gifted to by my dad. Dad had given us $10k last year when we first started looking.
We had planned on putting down 10% (nearly $60k) which we’d saved up in addition to a $20-30k cash buffer, plus my company stock worth about the same amount, but we ran into a bank snag and couldn’t get PMI on the property because I didn’t have 3 tradelines since my student loan was paid off the month before. Suddenly we either needed to go FHA (and pay a lot in mortgage insurance) or put down 20%. The cash buffer shrunk, I took out a smallish 401k loan, sold stock, and then called Dad for a loan. He loaned us $25k, which we’re repaying monthly over 9 years, at a bit over the prescribed IRS rate, with a contract (just a cheesy Suze Orman template, but it works).
We could have sold all of the stock at a high tax rate or pulled more out of 401ks to come up with the cash, but it would have left us with very little liquidity. I’m hoping to pay it off early, but for now we’re getting settled in to the mortgage and all the little Home Depot trips. 401k will get repaid first, then extra to Dad. I already built in a bit of accelerated payment (official payment is $275 or so, we pay him $300) and I don’t think he’s really concerned about it – he seemed surprised for some reason when I handed him the first repayment check at Christmas. I’ll set up an autopay this month and then not have to worry about it.
I think there were a couple of things in my favor here – we’d already shown that we’re good with money (saving $80k in about 2 years) and my grandparents had died the year before, leaving Dad with an inheritance he doesn’t “need”, per se. It seems to be working so far, but we’ll see where we’re at a couple years down the road.
Nice post. I have been on both sides and it is uncomfortable for all involved. My rule now is never to borrow money from a friend unless it is your last resort (you are going to be evicted from your house tomorrow) and preferably from a friend who feels the same way that you do about money. Never lend unless you can afford to lose the money. As the borrower, you will find that you will no longer talk to that friend about money issue until the loan is repaid and if it takes a long time to be repaid, it is quite a burden on the friendship. If you lend with the expectation of repayment, you will get upset every time your friend starts talking about a designer shoes she bought or a vacation she just returned from because the loan has not been repaid and you don’t buy designer should and have not taken a vacation in a long time.
@Genevieve
“I disagree that my parents are getting the short end of the stick. They are getting approximately 2-3x the interest rate they would get in a CD.”
Genevieve, you still don’t get it.
They are getting a higher return than a CD because they’ve taken on higher risk than a CD.
It’s simple economics. The market pays a premium for risk. It’s a fundamental law of economics. If something is higher risk, it must offer higher return, otherwise nobody would ever invest in it. Conversely, investments that offer lower returns must guarantee lower risk.
CD’s are rock-solid. They are FDIC insured, so unless the entire economy collapses and the government dissolves into anarchy, you will get your money. That’s why the rate of return is so low. There is almost no chance at all that you will not get your money.
Mortgages, on the other hand, are by their very nature higher risk. They depend on human factors. Even mortgages that are secured against collateral (the house) command a higher interest rate than CD’s. Unsecured loans command higher rates still.
That’s why I said you’re cheating your parents. You’re offering them all the risk of a huge, unsecured loan (which the market dictates is worth at least 5-6% rate of return), and you’re only giving them 3.4%.
This is all very basic economics. It’s called the “Risk Premium,” and it’s part of what makes our economy work.
@Brian:
Sounds like you weren’t really ready to buy the house. Actions like yours are what contribute to the economic crisis we’re now in the midst of: buying a home you can’t afford, lying to the bank (submitting a written declaration that the money from your brother was a gift, when in fact it was a loan).
And yet people still want to dump all the blame on the big, evil banks, and none on the “victims” who acted deceptively, like our friend Brian.
I have a rather large family. There are those in my family who choose to not do anything to improve their financial situations. They are constantly looking for a handout. They are always looking for those of us who are financially successful to bail them out of their financial situations. They mis manage their funds. For example, I have relative who called my husband and I and asked us to pay her electricity bill because it was going to be turned off the next day. We asked her live end boyfriend about it and he gave her the money for the bills but she chose to spend the money else where.
We have decided that other people’s problems are not our problems. We can not ‘loan’ money to ANYONE while we currently have debt of our own. I currently work 2 jobs so that I will be out of debt soon. If My husband and I can do it then others can too.
I’m not saying that I will never lend money to anyone but I have seen a pattern, people come to you at the last minute looking for you to provide a solution because they have no other way out. For example in the electricity bill situation, her electric bill was 2 months behind. Why didn’t she ask for assistance when the bill was going to be late the first time.
I have so many examples of people asking us for help after they have mis managed their funds. But I am starting to rant so I will take a timeout for a minute to calm down.
By the way, if people truly need loans, there are BANKS
Just wondered if people know that you can deduct unpaid loans off of your taxes. If you do that, the recipient has to pay income tax on the amount they defaulted on. I don’t know the details, such as what paperwork is required.
On an unrelated note, my mother is constantly giving/loaning money to my dad’s deadbeat relatives. My parents barely live above the poverty line themselves, so they do not have the money to spare. One day she was contemplating whether to “loan” one of them $1,000 to get a new apartment. They had given her another big sob story about their misfortunes. I asked her, “If you were very wealthy, and you gave them $25,000, would it really make any difference?” The answer in this situation is definitely “No,” because they have had so much given to them already and it never has made a difference.
I’ve borrowed and lent money, or given money, quite a few times – never more than I can afford to lose, and it’s usually worked out. Partly because we’re much more frugal than almost everyone we know, so they don’t ask if they’re in the “can’t make my mortgage but bought a new TV” stage.
The only time I’ve had written records were when I was in my early 20s and had to borrow money from my mom, and when I had a friend living here who was both very bad with money and had had terrible luck (near the end of her lease, while apartment-hunting, she was laid off from her job). The friend and I had a bunch of financial relationships all aimed at getting her back on her feet and learning better habits – I held some minor savings from her and wrote her receipts when she gave me the money, she owed us rent (and sometimes could not pay it on time, so again the receipts), and I lent her money for a professional interview outfit so she could get a better job. The relationship ended badly, but not over money – she eventually paid back every penny AND seems to be in a much better place financially now.
But when it’s a sudden misfortune that makes people want a loan – car breakdown, no christmas gifts because of a strike, grad student eking it out through the dissertation phase – I’m way more likely to just give cash, if I can.
@132 That is an awfully harsh comment on such a warm-hearted story. When going through the loan process you are given GFEs the whole time. Sometimes at the very end when things add up it doesn’t quite work out in your favor. I think his brother was very sweet and Brian was great to give his brother more than what he borrowed for coming through for family.
I have loaned friends money, with the expectation that it is a gift/I will never see that money again.
However, one of my friends really frustrates me. He acts mildly offended by my statement that it is a gift, saying that he is not some freeloader… but either doesn’t have the resources, or the motivation, to pay me back consistently. And constantly seeks reassurance that I don’t think of him like he thinks of one of our other friends (who has borrowed money, then never mentions it again, and seems to have no desire to repay it.)
I’m fine with giving him money, I just wish he wouldn’t whine and expect hugs and cookies and reassurances that I think he’s going to pay me back… because I don’t really care!
If you told your friend that its a gift but that she could pay it back then that seems to muddle the water a bit.
I’ve never heard of a gift that had to be back unless you both exchange gifts like for xmas, office party, etc.
My sister was having a really tough time at her job and she wanted to start her own home daycare. They didn’t have enough capital to do all they had to do to start it. So we lent her $3000. I followed the exact same thing as is outlined here. Talked it over with hubby, (He was ok with it), mentally prepared for not seeing that money again, and helped her to find used resources for her daycare (to reduce costs), and for the time until I had my own baby handled all the advertising and even got her first client for her. I told her not to pay us back for a year until she starts seeing some profit. But she was so conscientious that she started paying the first month she had a client. Every month she paid $250 until she paid it off. Today, she has a very successful home daycare and I am so proud of her.
Often times, when life gets a tad more complicated, the more we forgot about sticking to the essentials.
And the more we need to.
Lending and borrowing money is one of such issues.
A few basics to help us sort through the emotional knots:
– To borrow from someone, U are putting your relationship with that person in strain.
– To lend money to someone, U’re also putting your relationship with that person in strain.
– When possible – refrain from either lending, or worst – borrowing.
– If one really needs to borrow, work out a repayment in a short period of time. That is simply – repay full amount in as short period of time as one can.
– Money issues reflect a person’s attitude, habits and lifestyle. Such are deep-seated and often recurring.
Bear these insights in heart – before one borrows or lends. 🙂
@AC:
“That is an awfully harsh comment on such a warm-hearted story.”
Sure, it’s a heartwarming story, but it doesn’t change the fact that Brian lied to the bank, and stretched to buy a house he couldn’t afford.
You’re right – when buying a home, sometimes the numbers aren’t quite exactly what you expected, and on closing day there are some unexpected expenses. $4,000 in Brian’s case. So why didn’t Brian just dip into his savings? Or, if absolutely necessary, take it out of his emergency fund?
Because he didn’t HAVE an emergency fund. He was living right on the edge. He was buying a house he couldn’t afford, and deceived the bank to get it (making his loving brother complicit in his deception). Sure, it’s beautiful that his brother would jump to his aid, without hesitation. I’m sure Bonnie and Clyde were deeply in love too. Doesn’t mean they weren’t in the wrong.
I’ve never borrowed money, or lent it, that I can recall. Scratch that — I lent/gave $400 to a boyfriend years ago. Don’t remember if I got it back, I think I did. We were together for years so it might have “come out in the wash.”
I have been gifted money by family a few times. My grandparents are in their late 90s and are starting to give more generously at Christmas, for example, since they’ve done well with their investments and would rather pass some money along while they can see their children and grandchildren enjoy it. These are not life-changing amounts but are much appreciated.
I have one friend whom I would lend money to in a heartbeat, no questions asked. He is highly responsible and also someone I would trust with my life. We’ve actually talked about this, just musing over drinks, and if he called me one day and said “I need $10,000 as soon as possible, I can’t explain why” I would tap into my savings and give it to him. That’s based on our lives today, of course. He would do the same for me. Honestly I don’t know if I would do the same for my own family, I’d ask a lot more questions at the very least.
I loaned my son $500 about a yr ago. He has made no effort to pay me back & last month he was planning to spend $200 on something he did NOT need and I got angry about the $$ he loaned me..
A few weeks later he was fussing @ his little brother for owing him $50 he had not paid yet.. Their conversation made me think of a time when I heard Dave Ramsey say that if you ever loan $$ to a family member consider it a gift..cause you are not likely to get it back…
I told him then if he never mentioned the $$ his brother owed to him again I would never mention the $$ he owes me again…
It has been 2 weeks and so far nothing else has been said…BTW.. my kids are old enough to have a job and pay each other and me back..
I had a very close friend for 10+ years that was never very good with money. He ended up over the years to owe me several thousand dollars. It often came up and caused unnecessary stress in our friendship.
He recently tragically died in an accident, and I tell you what, I wish I could go back and reclaim those useless moments. It just isn’t worth it.
I would never loan money to friends. that only destroys the relationships. I keep money and friendship separate. If you dont want to lose your friends, then dont loan to them
I had somewhat of a relationship going with a guy I worked with for about 5 months or so when he was fired in October. I knew prior to him being fired that he was having money issues but he also does have a girlfriend and 2 kids at home, so there is another income coming into this household. A few days after being fired I offered him money and he was hesitant at first but then accepted it. When he came to pick up his final check, he needed money to get his tool box towed to his house so I have him the money for that as well. Then a third time around he needed money for his phone bill which I also gave him money for. Although he never actually came out and asked for it, I offered it because I felt that we had a good enough relationship that he would in fact pay me back like he said he would once his unemployment kicked in. The last time I saw him was about 2 months ago now and that’s when he told me how much he was getting off his unemployment, but still no mention of paying me back. A few days after that he had texted me asking if I had $20 on me and if I could pay one of the guys we work with because he owed him money and didnt want to come here. So I agreed because thats how I am and I felt bad. At this point it was going on about 2 months since I gave him money for the first time and I have yet to see any of it back. I finally asked him after the new year when he would be able to pay me back because I was wanting to go back to school and needed it. He told me that he got paid on January 6th and would give me half of it then 2 weeks later, the rest. Well when the January 6th came around I asked if he was still able to pay me back and he said he wasnt getting a check until the following week. So when the next week finally rolled around, I tried getting a hold of him, but no response. I knew there were issues with his girl friend finding out about what was going on with us and figured she was around and couldn’t talk. Finally after not hearing a response to any of my text messages I called only to find out that his phone was shut off. Now I know how much he owes his phone company which is a lot and figured it was turned off due to lack of payment. I asked one of my co workers if he had heard from him and he goes yes he called me last week to tell me he got a new phone number. At this point was more upset due to the fact that what had gone one between us (money aside) and he didnt give me his new number. Part of me wants to believe its because hes trying to patch things up with his girlfriend but I also feel like its because he doesn’t have the money and is figuring he can just run from me. I never in a million years would have ever imagined him doing this. So at this point I have pretty much accepted that I am not going to see him or my money ever again. People keep telling me to go to his house but I’m not like that. Ill eventually run into him, and I do have this new number I just dont want to come off stalkerish calling it when he clearly doesnt want me knowing it. I did send him a facebook message asking what happened to his phone and I did see that his best friend posted on his wall asking about his phone as well… so I am not the only he didnt give his new number too. I just never expected it to turn out like this, and I guess I’m the only at fault for giving it to him because my intentions behind the loan was that I would still have a reason to see him because I was only able to see him at work and when we would go out lunch. My fault I guess.
I’ve been a recipient of generosity on several occasions, all at or in excess of $10K, and all under different arrangements.
The first time, I was headed to a top tier business school but, having had a very low paying non-profit job, had no savings to cover the cost of my move or initial expenses. I asked a sister (who already had an MBA and had worked for years on Wall Street) for a loan of $10K. She was happy to comply. When I graduated and got my first job, I was preparing to begin repayment when she sent a check for another $2K to help me buy furniture, and the clear message I owed her nothing. It was a wonderful gift that cost her little but meant the world to me.
The second and third gifts came when I bought my first house. Having left corporate life after only a few years to enter the ministry, I was again dealing with a fairly low income. One couple, having seen the homes I was looking at, wanted me in something nicer. They came to me with an offer to join me in the purchase of a home — I would own 51%, they would own 49%, and they would pay 49% of any maintenance or upkeep. All the details were worked out, legal paperwork was drawn up, and this amazing couple didn’t even see the house they now partially owned until after the closing. It’s worked out beautifully and the investment (less than 1% of their net worth) has made a huge difference to me. The fact that they have equity ensures that I don’t feel beholden, and has allowed us to remain great friends.
At the same time, another couple learned that I was going to use my emergency savings to pay my share of needed roof repairs, rewiring, etc. They didn’t want me to do that, so they offered to provide me with a 30 year loan, at a low interest rate, for the $30K I was planning to spend in the first year. Again, all the proper paperwork was signed, and a monthly amount is deducted from my bank account every month. Since I’m paying interest, I feel as if I’m an investment providing a solid return, and I have the freedom to pay it back when I can.
The key to all these arrangements has been A) the amount was relatively insignificant to the people offering help; B) any and all repayment was reasonable for my current financial situation; C) for the non-family deals, papers were signed and there is some security to the investments.
I’ve been astounded by the generosity shown me, and should I someday be in the position to do so, I would make it my mission to pay it forward.
I don’t loan money to people, but if I can swing it I will give it to them. At least that’s how I think about it. They might want to pay me back, but if they can’t I’m not worried about it. I think some Biblical principles are what got me to that mindset, but it was made concrete when I had to loan my parents a pretty significant amount. They said they were going to pay it back but kept giving me reasons they couldn’t. To prevent myself from being angry, I just decided that it was a gift and they could pay it back if they could when they could. Eventually they did, but my life was made easier the instant I decided I didn’t need them to pay it back.
These days I wish I had even more that I could use to help people when they needed it. I’m finding that I’m much happier being generous than I am making sure I have enough for myself. And I never want for anything.
-j
@Nicole, I agree with the poster who brought up the subject of children because some people use that as an excuse to get people to help them. When I had my daughter, I was young but I knew that Christmas was EVERY December and November 12 was her bday EVERY year so I made sure things were covered. Also, as far as her eating, I knew she had to eat so that meant I had to do WHATEVER kind of legal work I could to provide for my child. Some people just sit back and use their children as an excuse to make people feel sorry for them. IMO
@Quest, if you stop loaning to your friends, then you can stop borrowing from your parents. That’s a lesson I had to learn.
@Fairy Dust, how can your husband loan your money to his friend? I could not even think of asking my husband to loan my friend $10K.
@Nichole 150: To my husband, money is just something to be spent, and if he can use it help out a life-long friend then he will. It was that simple. I’m not sure what would have happened if I’d tried to put my foot down and say No! flat out. I expressed extreme displeasure with the idea, but didn’t try to stop the process, probably because they have been friends for more than 50 years and I actually hoped the friend would keep that in mind and pay everything back. Silly me!
@Melanie, the greatest gift you can give your children is to teach them to save so you will not have to help them as you were and your parents were. Like Dave Ramsey says, “Time to change the family tree.”
We loaned $500 to a friend a year and a half ago to help her with a deposit for an apartment. Since we’v been friends, she’s never managed money well, has never had more than a few hundred dollars in savings, and no retirement. She promised to repay the loan with her tax refund that year. Well, after she received her tax refund and didn’t mention the loan, I asked her if she still planned to repay us. At this point, we had gone through almost our entire savings because we had about $5,000 in emergency veterinary expenses, and had to put a new AC in one of our vehicles. We were forced to start using our credit card for our pet’s on-going medical treatments, so I felt justified asking about the money. I honestly believe she thought we would not expect repayment. She told us that she would “see” how much she had left from her tax refund after paying for new tires and a few other necessities. We finally received half of the $500 last Spring, but she has not mentioned the remainder of the loan. I guess what is so frustrating to us is that she goes out to dinner several times a week, has the premium cable channels and the highest speed internet, but these are things we cannot afford. We are fortunate that we have never had to borrow money and have been able to access money from our savings or even 401K loans, because there would be absolutely no one in either of our families, or any friends, that we could ask. People have always come to us.
Just last week my brother asked to borrow $4,000 towards a down-payment on a house, yet my brother hasn’t been employed with the same company for more than a year. First, I never know if he is telling the truth about his need for the money, and second, if you cannot save money for a down payment on a house, then you should not be purchasing one until you can afford to do it without asking family.
I am empathetic to peopled who have honesly fallen on hard times, but not to the ones who cannot manage their money.
My mum borrowed money from me quite often, around 1 to 2 k each time, but she did pay me back. I did not ask why as its not a very large amount of money.
But this time, she brings me to a bank and use my ID to borrow a personal loan and asked me not to tell my bf and my dad. its 20k, and when i asked why she needs that lum sum of money, she just talk nonsense to me. I know she is hiding something. What should I do? To lend or not to lend? Im still waiting for the loan to be approved..
I had lend my friend money for her rent payment for her apartment for one month. She lost her job and didn’t have money to pay so I wanted to help because we knew each other for a long time. I helped her find a job but she was picky about where she wanted to work. She promised to pay me back when she could but never did. I didn’t expect her to but I also didn’t expect her to change her phone number and lose communication with me. It’s sad she chose to take my money and hurt our friendship. I was only trying to help as a frie nd is suppose to always be there for each other and I cared for her. That was the first time I helped a friend with financial problems I learned my lesson. Is there a way to get my money back we all work hard for our money it doesn’t grow on trees, I had a bad feeling about that?
My brothers are always in some kind of financial trouble. One of them is in a very tricky situation, his wife left home and left him with the kids. Hard to believe but it’s true, so anyway He has no steady job and he is always asking for money. I promised myself I wouldn’t lend him money, since the one time I did he got mad when I asked for the money, but I have to say I did it for the kids, so I lend him $500. I noticed he started spending more after a few weeks, going out with friends and all. I asked for the money and he was ranting for a good half an hour yelling and telling me some pretty hurtful things. I know I’ll never get that money back, we started speaking to each other again after a while and I know I’ll never lend him money again.
Funny enough my other brother who has a job, a fancy car and everything needed some money to expand his business. I lend him my life savings, close to $10,000 . I just found out he is drowned in credit card debts he owes a lot of money and I can’t find him anywhere. there’s my story do NOT lend money to your friends and family.. or to anyone for that matter. I happen to have a couple of douche bags as brothers but don’t let that happen to you 🙁
My story is quite different, as in I’m the one lending money from my friend.
He has quite a large amount of money saved up, I on the other hand have a large student debt which i’ve been paying off without problems but slowly in part due to high interests.
So he’s now lending me 25 k for a higher interest than he was getting on his savings and about half of what I used to pay. We’ve come up with a contract in which its detailed what to pay back and when, and importantly the backup plan. Meaning i’m required to keep open a line of credit from which i can pay him back if necessary. This makes his investment saver, and makes me happy as well in the knowledge he wont get into trouble by helping me.
Its a win win situation with enough failsaves to ensure no problems in our friendship. But its definately a loan and not a gift.
So if you plan and think this out carefully this can work to.
I am pleased to read that for some lending to family has worked out and repayments made. For me, my story is where the money hasn’t been repaid. In 2003 I loaned my daughter and her husband £30k with which to buy a house in South Africa. My son-in-law asked me how I wanted it repaid, and I told him. I asked him to put the money into a savings account, and once or twice a year to then draw it out and send the money to me in the UK. he told me it couldn’t be done. I had asked on several occasions for the money to be returned (I am widowed) as I have needed the money for dental treatment. He makes lots of promises but so far nothing has been forthcoming. Then in October 2011 I was so angry with them, that I sent a stonking email to them both saying that I felt they held me in contempt, because they had ignored my requests for repayment. My daughter refuses to have anything to do with me, and my son-in-law continues to make promises to repay, but as before, nothing. So, I agree with those who say that it’s better not to lend to family members or friends more than you are willing to lose. Like a fool, I received a phone call from my son-in-law 18 months ago to say he had left the firm he was working for, and starting up on his own, and needed money for mortgage payments, school fees etc., and so I sent him the money. He promised to repay the money as soon as things improved. They have improved to the point they have gone to Kruger for a holiday, they are in the UK at the moment, and the trip would have cost them £7k. Just before they travelled my daughter sent me £900. However, even though I have been in their company with other family members, I am ignored and sidelined. I loaned them the money because I was vulnerable and thought it was what I should do and most of all because I loved my daughter. However, I now realise that I have been cheated, and there is no respect or honour from either my daughter or her husband, and the way they treat me you would think that I am the bad person here!
I think that one should look at this problem from all sides. First,look at the amount that is asked for,and whether you can afford to loan out the money. If so,make sure that you lend an amount that the person can afford to pay back.For example,if you decide to loan the person 5000 dollars,and the payments will be 100 dollars per month,then this is probably a reasonable amount to lend out,if you have it. Help when possible,whenever you can,for as much as you reasonably can afford. The only limitations are the following: 1) Don’t take out a loan,in order to lend that money to someone,unless you can easily afford to do this. 2) DON’T MAKE CONDITIONS:in other words,don’t make the loan based upon the loan receiver doing some specific thing to get the money. 3) Have a specific payment plan in place whereby it is specified that the money is to be paid back at x amount per month for x amount of months. 4) Draw up a contract with your(and the loan receivers) signatures,acknowledging the above stated conditions. 5) Loan the money based upon need or hardship,primarily(credit card debt,etc). If you do this,it should turn out well for both parties,in most instances.
On a different note. My Partner of 10+ years wants me to pay off his sister’s mortgage when I get my inheritance. I really don’t want to do that. I need the money for myself and my retirement. Your thoughts?
I think you answered your own question. You need your money for you own retirement….
People need to learn to be a bit more selfish and simply say no. Also when receiving a “windfall” don’t tell anyone. If your wife tells someone you came into some new found cash split the winnings in two and have her give it from her half 😉
its a great article..
what my question is… my friend has lost his wallet.. with all his credit and debit cards.. and he asked me for money to lend him for couple of months.. and there is no document signed.. now he is showing his back in returning.. not taking my calls and not answering my msgs.. what can I do in this case..
My husband and I loaned $700 to a friend I’ve known for 20 years, but have only been back in contact with since March 2011. His bank account was cleaned out in May 2011 and he needed $600 to pay a bill. This $700 got taken from his acct also. I didn’t give him anymore though. He is always talking about not having any money, which makes me feel very uncomfortable. I recently learnt he owes about 30K on a credit card. Had I known this last year I may not have lent him the money. He is in the Army, earns 70K plus allowances, rents a house(and gets an allowance towards his rent from the Army). He gave up smoking and drinking for 3 months in Oct last year because he did some sums on what his habit was costing him. When I asked him earlier this year how much he had saved, he said he hadn’t really been able to see it yet. He took these habits back up in Feb. He told me today he is thinking of moving to live on base and putting what little furniture he has into storage as a way to save some money. When he asks how my weekends are, I feel uncomfortable telling him about any purchases I make or activities my family do. No payment plan was discussed back in May. I honestly thought he’d start repaying the money on a fortnightly (each payday) or monthly basis. Can I be so blunt after 10 months and email him my acct details and ask for him to start making regular payments? I really don’t know what to do. Another thing, I was purchasing concert tickets in Nov 11 for a gig in July and I asked him if he wanted me to get him one and he could pay me for it. Of course he said yes. Again this was before I knew about the credit card debt! He thought he was being deployed in April for 6 months, but this has recently been cancelled. He was hoping to pay off some debts with the money he would have earnt and saved in that 6 months. I’ve been toying with the idea of asking someone else if they want to come to the concert in his place and telling him that I offered the ticket to someone else when I thought he was going away. I can’t just lose $800 (loan plus ticket). We have a large mortgage and I’d like the money repaid. As I mentioned earlier, we didn’t discuss a payment plan, but I’m getting more annoyed with each passing month with him not saying anything. I don’t bring it up as I feel embarrasses for him. It just irks me that he hasn’t offered anything after 10 months, but I know he still buys his smokes and his beers every week. Any suggestions would be greatly appreciated, thankyou.
With “friends” like these, who needs enemies? Indulging them all in their selfish financial emergencies will have you living in a card board box in an alley in no time flat. I would NEVER ask someone for money and not fully intend to repay them. It sounds like the “friends” of the previous posters never planned on repaying them in the first place. The only reason I would give money to someone is if:
(1) I can afford to do it.
(2) I want to get rid of the person.
I planned to borrow some money for a car and I suggested to my parents that they lend me the money at 7% interest, better than the 3.5% they were getting in the bank, and cheaper for me than the 13% that the finance company would charge.
Frustratingly after I borrowed the money, they said they only wanted the principal repaid, however I have persuaded them to accept 4% to cover their lost interest in the bank. I am 6 months into the 12 month loan and have made all payments on time each month. I treat it as I would a bank loan so as not to damage our relationship.
I have a friend who was going through a divorce. Immediately prior to separation and during the early days of separation, she needed money to retain a lawyer and to live on and once before the separation, just to get away for a weekend alone without her husband knowing where she went. (Her husband was abusive and had hidden all their assets from her for over 30 years, so there was no way to know what there was or how she’d end up.) Here’s how I handled it: When she needed 9k to retain a lawyer, I went the my bank and got 9k and gave it to her. No contracts, no agreements, just pay it back when you can. When she needed to get away, I went to my safe and took out 2k and gave it to her. No contracts no agreements. Did she pay me back, mostly yes. She got a substantial settlement and alimony. She has plenty of money now. Did I care. NO. What mattered to me was that she was OK. That’s it. You think I’m rich? I’m not. I’m struggling every day to keep above water. But that is not what’s important. I don’t understand why people are so obsessed with money and why they will let it become more important than those they love. It’s beyond description.
I am currently full time at a government firm and owns a coffee shop. I have 5 very close friends and one of them decided to open a coffee shop because she sees how easy i was managing one while having a full time job but you can’t judge anything from the outside. My partner and i worked very hard for it. Story cut short …
She wants to borrow from us some money for her new business which i have already explained to her that with such such amount you will not be able to last.. but knowing her stubborness and because i can’t say no to anyone i lend her 10k AUD in February and she promised to pay me back in September because my partner and I are going to get marry. Her business did not turn out good so she ask us to lend her more money, we were in debt ourselves when we set up our business, she pleased me to apply for a personal loan so i was stupid then to applied one for her under my name $15k AUD in May. She does make repayments but it is always late. My partner is angry at me because we would have to take money from our credit to pay it in advance for her.
Now it is September and i have not heard anything from the 10k that she was suppose to pay back so that we could organise our wedding. I am stressed out at the fact that my wedding is in December and i haven’t manage to pre-paid anything or even pick a dress yet.
What hurts me is that last week she just asked me to borrow another loan for her which i said i can’t. I thought that was the end of it but it turned out she has been backstabbing me with my other 4 friends and saying i have money to pay for my wedding ring and not for her to loan. She said a lot more and it was a one side story and they never knew the money i lend her was from a personal loan. Now my girls are falling apart.
Silly of me to lend her from the beginning. I really think friends should be kept away from money unless it is a small amount and they could pay you back on their next wage.
April,
Thanks for a good article. I am putting together a service that allows friends and family members to casually borrow from one another. The service will include features that address the common concerns about lending money to friends and family members. I would definitely be interested in your opinion and comments about whether such service would be useful and about specific features that you think should be addressed. Thanks.
You can’t.
Best answer yet!
You made me laugh!
A few months back I was out shopping with a friend when we came across these gorg boots. I simply made a comment on how nice they were and my friend went on to agree how nice they are and then said “lets just get them! Ill buy you a pair and get myself a pair..I mean when will you ever find italian leather boots for $150?”, I went on to say “yeah but Im not sure when or even if I can pay you back” and she shrugged it off saying the bill wont come for months, no worries, you gotta have them. So I must have said “are you sure” a thousand times while walking through out the store, and knew in the back of my head I shouldn’t accept this gift but allowed her to sell me on it. Stupid I know because I was unable to save up the money for them like I had worried and when the time came for the bill to be paid she asked me for the money (on xmass eve I was asked) and when I told her I did not have the money naturally she got very upset..so much so she said a lot of nasty things. Heres the thing. I only wore them once for like 2 hours since they are so nice and I have had worries over them since I got them, I guess I was to scared to wear them – still have the inserts that came in the boots w/ tissue paper & original box, so I asked if she still had the receipt which she replied yes so I asked if we could return them so she could be credited back the money but that was not good enough for her and she left it off again saying nasty stuff ending it with “do what you want with the boots. Im over it and our friendship.” How should I react to that?
I loan money on a week to week basis and charge 50 cents on the dollar. if they dont have the money on friday it is doubled the next week. I explain all my rules before ever lending any money to anyone. my paychecks are around 425 dollars and my loans have a revenue of about the same. ive took some hits along the way but I try not to loose my cool on the first mispayment and I always start off low and let the person build credit with me.
Family helps family. That has been the way it is in our family for over 50 years and I don’t think there’s anything wrong with it. But, friends I don’t think I’ve asked for more than 5 bucks from in all of my life. I’ve let friends buy me things before though. Look… You wanna buy me something, I’m happy to oblige, but it’s clear I wasn’t asking outright and I don’t owe you.
That’s the way it is a lot of the time. So often people have no choice in their situations and they are either going to have money problems or they’re not going to have them. I’ve never had a friend offer me a loan… ever. I have, however, had them (former friends) do just about everything possible to keep me from earning money.
I’ve never asked for money from anyone amounting to more than a few hundred dollars, but I have accepted something worth a larger sum of money as a good faith loan; without interest and without terms. This was because of a complicated situation that I was not responsible for.
I pay rent, and I pay bills, but I might never be able to pay back that one time good faith loan, no matter how much I try, and the reasons for this involve just about everything but me. I even proved that earning three times the loan amount for three years would not yield enough spare cash to make me solvent in principle because the cost of living and getting to work was so expensive.
I thought I might have been too wasteful, but every time I ran the numbers I had barely enough to make it. See. It matters more that you have money when you need it. Sometimes, you could have a million dollars tomorrow, and your future worth could be fifty million, but you can get ran to the rails over less than fifty dollars today.