borrowing from friends

Should You Lend to Friends and Family?

Maggie Wells — Thu, 13 Oct 2011 10:36:30 +0000

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?

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This article is from Maggie Wells of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Borrowing from Friends: The Friendship Killer

Nora Dunn — Thu, 03 Sep 2009 17:00:02 +0000

How many friendships have you lost (or almost lost) because of money? If money matters are a touchy subject to begin with, then how are we expected to navigate the murky waters of borrowing from friends?

We’ve all been there (on either side of the spectrum) before: A buddy asks you to spot them $20, but never seems to have the cash available to pay you back, or they continue to forget when they see you. And when, months later, they buy their fourth round of beer in front of you without handing over the $20 that has been slowly eroding away at your sanity, you pop. Your buddy has probably forgotten that they even owed you anything and immediately hands you the cash, but the damage has been done. Your friendship now faces trust and communication issues that may or may not be overcome.

Now, $20 is a fairly easy loan amount to forgive or forget about. But what if that $20 is $200, or even $2,000 or beyond? What tension will exist in the friendship as a result of an outstanding loan?

Borrowing from friends can bring to light a number of issues that, without the loan, would be relatively innocuous:

It highlights the financial inequalities between friends
It creates a sense of obligation within the friendship
It may not be taken as seriously (by either party) as a conventional loan

Navigating the Pitfalls

Is it possible to effect loans between friends without compromising the friendship? Here are a few questions for each party to ask to help determine if the loan proposal is a mine field or a walk in the park:

Questions for the Loaner

Is the money in question a lot of money to you?
What else would you do with the money if you didn’t lend it to your friend?
Why is your friend coming to you for the money and not somebody else (or the bank)?
Will you draft a formal loan agreement and charge interest at the prescribed rates?
How will you collect loan payments?
What will you do if your friend defaults?
How do you think the friendship will be affected both during and after the loan is in effect?

Questions for the Loanee

Why do you want money from this friend in particular?
Why can’t you go through more conventional debt channels for the loan?
How exactly do you plan to repay the loan?
What will happen to the friendship if something unexpected takes place and you can’t make a loan payment?
How will your life change as a result of this money being lent to you?
Is it worth possibly wrecking the friendship to borrow this money?
Do you think your friend will attach unnecessary strings to the loan?

Saying No

One of the reasons more friendships are killed by loans than is necessary is because it is easier to say “yes” than “no” to a friend. Your instinct may be telling you that this friend isn’t reliable with money, but since they are a friend and wouldn’t (intentionally) rip you off, you trust that it will all wash out in the end and save yourself the grief and stress of saying no to the loan request.

However, it is ultimately easier to face the temporary discomfort of saying no to an initial loan request than it is to have some of the tough conversations that ensue after things get hairy if you proceed with the loan. Most friends will understand a “no”, even if they’re initially unhappy with it.

Not Asking

And if you are the friend in question who needs money and has few options other than friends, you could stand to save a lot of grief by simply not asking your friends for money. Even if you are disciplined with your money and making payments, the scope of the friendship will likely change as a result of a loan coming between you. In the same way that we don’t like to have a friend cover the tab all the time when we go out (even if they are better off), invisible lines can be drawn in the sand that have a subtle yet profound effect on your relationship.

Have you lost a friendship because of money or a lending horror story? Conversely, have you had good experiences lending between friends – and if so, what did you do to navigate the pitfalls?

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This article is from Nora Dunn of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: