Should You Lend to Friends and Family?
It's happened to all of us at one point or another. Something has happened to someone we love, and money is needed. Our money. If perfect strangers asked us for money, we'd more than likely not give it, end of story. But when a friend or family member asks to borrow, we don't usually say "no" right away. We think about it first. Some of us are more apt to help out friends than family or family than friends. (See also: The Different Types of Loans: A Primer)
I've been thinking about this a lot lately, as a good friend of mine just inherited money from the sale of her grandfather's house. We've watched as all sorts of friends and family of hers have come out of the woodwork to ask her for loans. To be fair, she was often insolvent in her youth, and most people feel justified, I suppose, in asking her for money. It has, however, reconfirmed my beliefs and suspicions about lending to and borrowing from those you know.
The Complicated Route: Agreeing to Loan Money
Lend it. Go ahead. Don't expect to see it again, though. Or do what some people I spoke to about this do, and treat it like a bank loan — sign a contract, charge interest, and set up a timeline for repayment that both parties can be comfortable with. This is crucial to getting the money back. If you don't set guidelines for repayment in writing, you have no one to fault but yourself if it doesn't come back to you in that timely manner you expected when you said yes over beers. Don't expect the party to pay up faster than you set up a plan for.
Your Expectations and Values
Is your potential borrower a good bet? Do they have the capability to pay you back? You don't have to do a credit check on the person, but what do you know about them? Do they have marketable skills? Are they willing to do trades? Do they continually have trouble? Do your homework with other friends and relatives, and find out.
If someone asks you for money, do you get to judge where the money is going? Can you lend it, no questions asked? This is where resentment comes to fester. If you can't give it or lend it freely without the judgment, it's probably best not to lend it at all. None of us spend money the same, and we don't value the same things. For example, I spend $400 a month on tuition so that my kids can attend a great school. I gladly remain in a single-car family so I can do this. Someone else might find that idiotic.
I lend money for groceries, school related expenses, and women's reproductive health concerns. I usually won't lend or give for anything else. The key in all this is communication. As long as both parties are clear about their values and expectations, things can go smoothly.
From the Borrower's Perspective
Hopefully no one out there wants to borrow money from friends or family, but it can happen. Unexpected car repairs, house repairs, or trips to the emergency room with the kids can strain and break the pocket book. Sudden, unplanned unemployment can take an almost permanent toll on individuals as well. There was a month back in 2008 when my husband was laid off, and I had a bare minimum of work the same week that our car needed repairs and tuition was due.
Three times in my life I've borrowed from friends and paid back. They are all three people whom I would lend to in a heartbeat. One of the prime reasons I borrowed from them is that they knew my situation and offered (I hadn't asked). I don't see anything wrong with things going back and forth between friends as long as it is a true back and forth and doesn't become lopsided in favor of one person.
My mother is one of the most generous people I know. She has given both to my brother and I when we've asked for it and many times when we haven't. She says that basically, she expects both of us to keep up the family bargain of helping her out with whatever she needs whenever she needs it — and she instructs us to help people in our community when we can. We are fine with this arrangement. The other night she made too much meatloaf and brought some over for us. Last month I made an extra tray of enchiladas for her. We treat our money between the three of us the same way we treat our food.
But if any of the above makes you uncomfortable, take...
The Easy Route: Saying No
Just don't do it. Loaning money affects your relationship with the other person and creates inequality between you. You go from being friends or family members with a shared past to a serf and a lord. You'll find that you can't help yourself eyeing the borrower's purchases without suspicion. If you establish early on in your relationship with other people that you don't lend money to family and friends, people will quit asking you pretty darn quickly (and move on to those who say yes). It's when you've said yes that the asking really starts.
How about you? What are your rules and expectations of lending money to friends or family?