Smart SpendingSmart Spending

3 golden rules for lending to friends and family

Are you the go-to guy for short-term loans? Say yes every time, and you may torpedo your own finances.

By MSN Money Partner Nov 25, 2013 1:48PM

This post comes from Donna Freedman at partner site Money Talks News. 


Money Talks News on MSN MoneyConventional wisdom holds that you should never loan more than you can afford to lose. Believe it. If your brother or your BFF asks for $500 for car repairs, you have no guarantee you’ll ever see those funds again.


How do I know? Because I'm owed money by both a relative and a couple of friends. They aren't bad people, just casual with cash. I've long since written off the relative’s loan, especially since this person has given me a bunch of rides to and from the airport when I visit my dad.


As for the other loans: I'm owed a total of about $2,100 but I'm about as likely to get it as I am to wring plasma from limestone. That was a calculated risk, and I have no one to blame but myself.


Fact is, I wouldn't have made those loans if it kept me from paying my own basic expenses. You, too, need to keep in mind whether you can truly afford to lend money. If it’s going to torpedo your own budget, keep that wallet in your pocket.

Here are the Golden Rules of loaning to friends and family:


Rule one: Make a policy and practice of saying "no"

Have trouble saying “no”? Try it a different way:

  • “That’s not in my budget. Sorry.”
  • "I have a strict anti-lending rule: I've lost too many relationships this way."
  • “I paid for your last car repair and you haven’t returned the money. I can’t do it again. Sorry.”
  • “Let me look at my budget and see what’s possible. I’ll let you know by the end of the day tomorrow.” (This is for when you’re blindsided and/or it’s a very emotional situation. Go home and send a “that’s not in my budget, sorry” email.)

Woman Paying the Bill © Fuse/Getty ImagesAnd if the would-be borrower continues to plead or badger you? Remind yourself that you cannot wreck your finances to prop up someone else’s. It’s really OK to reply, “I’m not in a position to help you and I won’t discuss it further. Sorry.” Be prepared to hang up the phone or walk out of the room.


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


The most important thing to do is formulate your own policy now, so you won't have to think on your feet when the situation arises. Maybe you only lend in dire emergencies, or to relatives with jobs, or to nobody, no matter what. The important thing is to decide on a policy, memorize it, practice saying it and stick to it - no exceptions.


And when confronted, don't beat around the bush. The ideal response should be immediate and firm.


Rule two: Try to help in other ways

Financial guru Dave Ramsey doesn’t think you should ever loan money, especially to family members. “It ruins relationships,” he says. “If you have the money to help then give it, don’t loan it.”


Don't make a habit of it, though. If your cousin or your frat buddy needs help on a regular basis, those cash infusions address the symptom rather than the disease. Whether it's careless spending or a lifestyle that's too big for its britches, the underlying issue needs to be fixed, not enabled.


Offer help instead of a bailout, suggests wealth psychology expert Kathleen Burns Kingsbury. For example, you could decline to chip in on an auto payment or credit-card bill and instead propose help in setting up a budget or paying for a few sessions of therapy for a compulsive shopping problem.


"It may be that you can negotiate something where you’re helping, really helping,"Kingsbury says, "instead of supporting unhealthy behaviors."

Other non-cash aid might include:

  • Making budget information available: Maybe your friend doesn’t want you snooping in his finances, but a site like Power Wallet will help him track expenses, set goals, measure progress and even find coupons – and it does it all privately
  • Helping list items eBay or Craigslist
  • Suggesting they investigate peer-to-peer lending
  • Assist them in finding a little extra work
  • Lending or buying them a personal finance book (I’d suggest anything by Stacy Johnson, Liz Weston or Clark Howard. 
  • Signing them up for newsletters from sites that offer the right kind of advice and tips. 
Rule 3: If you must loan, be smart about it

If you do decide to lend, get it in writing. Seriously. Even if it's your mom or the parents of your godchild.


You can get a free promissory note form online from this page of Suze Orman's website


Gail Cunningham of the National Foundation for Credit Counseling suggests getting the documents witnessed and notarized. This shows the borrower that you're serious about being repaid. It also protects you later on if things get ugly – for example, if that former BFF stands in front of a judge and says, "It’s not my signature."


Be specific about repayment terms. "As soon as possible" is vague enough to be interpreted as "any time from next week to never." Spell out what happens if you were to die before the loan is repaid: Will it be forgiven, owed to the estate or (if the borrower is a close relative) be subtracted from that person’s share of any inheritance?


You might also consider putting this phrase into the document: "If you don’t repay me via the terms on which we agreed, you will never again be allowed to ask me for money." (If this person has the chutzpah to ask for additional bucks a couple of years after stiffing you, turn the agreement into a paper airplane and throw it at him.)


If this is a major amount of money vs. spotting a pal $50 until payday, protect yourself by talking to a lawyer and, possibly, requiring something to secure the loan.


Again, you shouldn't lend money you aren't willing to lose. Promissory paperwork notwithstanding, are you really prepared to take a sibling or a friend to court?


P.S. With regard to my own money lending, the bank is now closed to all but the most serious family emergencies.


More on Money Talks News


26Comments
Nov 25, 2013 11:07PM
avatar
Never lend money to family or friends.  Give it away but don't lend it.  When you don't get it back, you won't be disappointed.
Nov 26, 2013 11:27AM
avatar
Money lending to family and friends can be one of quickest ways to ruin a relationship there is.  Never assume that the money you are giving is being taken in the same context in which it is given.  You may HAVE the attitude that you are giving/helping/supporting your family/friend out of love and loyalty.  On the other hand, your family/friend may have the attitude they deserve a hand-out from you; or, you owe them in some way. . .the list goes on regarding the justifications THEY might have for taking advantage of the knowledge you love and care for them.  I've been there and since have developed the motto: "Before there is no more dough, just say NO!!!"  Because it will happen.  When you lend money to a family member or friend the first time, its being supportive.  When you lend money to the same family member/friend the second time, it enabling.  Family and friends need to develop other financial coping mechanisms then making you an easy mark.
Nov 26, 2013 12:03PM
avatar
never lend to family or friends, unless you want to end the relationship. 
Nov 25, 2013 10:11PM
avatar
Don't expect to get it back and you won't be pissed off when you don't. If you can't afford to lose it, tell them to go see a real lender and bring some collateral as security. Dumb lending causes wars, just look at the world today.
Nov 30, 2013 1:12PM
avatar
It like the Government giving money to foreign countries we never get it back(case in point Isreal,Saudia Arabia) I guess they will always be our friends Need to stop all this Aid  BYE
Nov 25, 2013 8:57PM
avatar

Even getting a written statement from the person you loaned the money to is not enough.  They can still refuse to pay you back even if you take them to court.  The judgment is on record but the person may never pay.   As an individual you can not intercept there income or tax  returns, you are just screwed .  I suggest you only lend money if you can afford to loose it.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nov 30, 2013 1:34PM
avatar
It may be altruistic to help out at friend in need.  However, when you become their creditor you begin to lose that friend.
Nov 30, 2013 9:19AM
avatar
Always get collateral worth 4 - 5 times what the loan is worth and make them write it down when it is dew !
Nov 26, 2013 1:27PM
Nov 30, 2013 8:53AM
avatar
If it cost $20.00 bucks to to rid ones self of a pest ...the money was well spent
Nov 26, 2013 8:34AM
avatar
My rule is No to Money but Offer Food and Shelter.
Nov 30, 2013 9:01AM
avatar
Don't do business with a friend, whether it is money or employment. If a friend offers a job, and the job falls through, the trust and friendship goes away quicker than lightening.
Dec 1, 2013 3:35AM
avatar

Loaned one Son $800.00's 14 years ago, haven't received one dime and I was promised the money back with in a month later, it was to be a pay day loan.

Loaned one Daughter $15,000.00's ten years ago and not one dime, her boy friend that she married from Korea, won't allow her to pay me back, It was for a new car and some personal loan, they sold the car and told me to go to Hell.

I've also lost some Friends because I loaned them money and then they no longer know me.

Loaning Friends or Family money is  bad loan! 

Nov 30, 2013 9:51AM
avatar
 OK LETS SEE I THINK BACK YEARS AGO EVERY TIME SOMEONE WANTS SOMETHING ( CASH ). IT NEVER PAYS TO DO THIS. MY WIFE HAD SAID SOMETHING YEARS AGO AND I STILL THINK OF IT EVERY TIME SOMEONE WANTS CASH. PEOPLE ONLY SPEND MONEY ON WHAT THEY WANT NOT WHAT THEY HAVE TO. THIS IS THE MAIN REASON MY WHOLE FAMILY WILL NEVER SEE ANY MORE OF MY MONEY. THIS IS WHAT THEY ALL DO. DON'T FALL FOR THE ACT MY SISTER GOT ME YEARS AGO FOR A 1 YEAR LOAN IT TOOK 2.5 YEARS AND ME TO THREATEN TO TELL HER HUSBAND WHAT SHE HAS BEEN DOING BY SENDING HIM COPIES OF HER SECRET C-CARD BILLS. WE DON'T SPEAK TO EACH OTHER EVER SINCE THEN OVER 12 YEARS AGO. NO GREAT LOSS. CORAVETTE
Dec 1, 2013 1:26AM
avatar
My Dad always had the hardest time saying, "No".  Back in the early '80s, his 1st cousin asked him to cosign a $1200 loan for a car because his credit was poor.  You guessed it.  The cousin made the first payment and my Dad made all the rest.  He wouldn't confront his cousin and that really made me angry.  I decided that I would never let anyone take advantage of me like that.  I do NOT lend money.  I would give it to some of my immediate family members if needed but no loans.  I'm appalled at how people are so unwilling to repay a loan from someone who actually cares about them.  Shows how slack they are and how the love isn't reciprocated.  Don't ever let anyone guilt you into lending them money.  If they're using that tactic, they're showing how selfish they are.
Nov 26, 2013 12:15PM
avatar
Only problem you could lose both,but if you know someone that is a friend in trouble you should always help them out even if they don't repay.  That what friends are for in good times and bad times Right Dianne ,You might end up facing the mean one Judge Judy happy day  BYE
Jun 5, 2014 4:52PM
avatar
I just lent money to a friend. we were planning a vacation together and in the process of buying plane tickets together on the same flight. I bought mine first  online. my friend then attempted to buy theirs but had difficulty and got an error message of some kind. (we were doing this online while talking to each other oner the phone). I think she tried to put the payment over two credit cards, I then realized she can't really afford to go on this vacation but at this point, I'm already booked, so I panicked and bought her ticket so at least we would be on the same flight (international).  she is paying for hotels and such, but i'm sure not to see all of my money repaid. oh well, live and learn. 
Dec 1, 2013 6:44AM
avatar
--A Deadbeat friend needed money.
--I lent deadbeat friend money, she said it would be paid back soon.
For the next 2 YEARS, deadbeat friend 'reminded' me how she still owed me and would 'pay me back'.
Being TIRED OF HEARING ABOUT IT but never receiving even a dime, I told deadbeat friend to forget about it, consider it a gift (since I knew they never had any intention of paying me back anyway, and I would NEVER receive that money).

...I KNEW that "reminding" me was just their tactic of hoping I would forgive the debt.  Which I stupidly did, only because it was like salt in a wound hearing about how she 'owed' me.

DON'T say you owe me, just start paying me back!!!!  Even $5 per week, but "something" at least!

....2 years after that, she asked me for another 'emergency' lending (FOR SOMETHING STUPID).
I guess she saw me as an easy target or a 'cash cow' at this point.
I told her I don't have that kind of money and to ask one of her other friends that can afford it (which she did).
------THAT friend has not been paid back either and it's now 2 years later.  Once a deadbeat, ALWAYS A DEADBEAT.
Manipulative, sneaky and disrespectful.

Nov 30, 2013 4:59PM
avatar
I would not loan out money to no one and never have I would not loan jesus Christ money or my mother
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

ABOUT SMART SPENDING

Smart Spending brings you the best money-saving tips from MSN Money and the rest of the Web. Join the conversation on Facebook and follow us on Twitter.

VIDEO ON MSN MONEY

TOOLS

More