The 16 Cardinal Rules of Loaning Money to Friends and Family


Loaning money to friends and family is one of life's greatest dilemmas. On one hand, you want to help somebody you care for when they're in a financial bind. On the other, you know it probably won't go off without a hitch. Ultimately, the decision is yours on whether to extend that cash-filled helping hand, and if you choose the Good Samaritan route, it's important to remember these dos and don'ts.

1. Carefully Consider Who You're Helping

If it's your brother who's in need of a quick loan, and you know he'll pay you back on time with interest, your decision to lend money is a no-brainer. But if it's your deadbeat cousin Steven who has never had two nickels to rub together, but always somehow has pocketful of cash to buy rounds of shots for his lady friends at the bar because he wants to look like a baller, you should probably sleep on it.

When there's not a snowball's chance in hell that you'll see your money again, resolve to help without the expectation of being paid back, or just say no.

2. Don't Be Afraid to Say NO

You're under no obligation to give anyone — besides the government and your own creditors, of course — a dime of your hard-earned money. If you don't feel comfortable lending money to a friend or family member, just say no. They'll get over it. Or they won't, and you'll be better off for it.

3. Only Loan an Amount You Can Afford

If you have the disposable income to offer a loan without feeling the pinch, then okay. Only lend what you can afford without compromising your own financial situation.

4. Don't Expect Favors in Return

If you want to pay the person in need of money for completing tasks around the house or office, that's quite acceptable. There's no harm in earning the cash you need. But if that's not part of the original deal, don't expect the borrower to go out of their way to help you with anything. Sure, it's the decent thing to do — helping someone in other ways when they lend you money — but not everyone thinks that way, and it's not fair to place those expectations on unsuspecting people.

5. Keep it Strictly Business

Lending money is a business deal, not a friendly transaction. And when you treat it like the former, the experience is likelier to go much smoother than when it's positioned as the latter. Draw up a written contract, establish repayment terms — including interest (doesn't have to be bank-rate interest, but at least something minimal to provide motivation to pay on time) — and have both parties sign. Each of you should keep a copy, and post it on the fridge, as a reminder of what one of you is owed and what the other owes.

6. Never Berate Them About Their Poor Personal Finance Skills

If you've decided to help with loan, keep your opinion about their poor personal finance skills to yourself. There's no reason to kick somebody while they're down just to make yourself feel better. You can offer productive solutions to their consistent finance problems, but never in a way that makes them feel bad about themselves.

7. Establish Firmly That This Is a One-Time-Only Situation

Unless you want to operate as a 24-hour ATM, it's important to let the borrower know that this loan is a one-time gesture. Let them know that you don't want to be asked again under any circumstances. That might sound harsh, but you're not a bank, and people have a funny way of taking advantage of pushovers.

8. Avoid Giving Into Emotional Bullying

People who need money will sometimes pull out all the stops when trying to convince you to subsidize their life. Stay strong. Don't let those sad excuses and crocodile tears drag you down, especially when the dramatics are from someone you know better than to trust with a loan.

9. Suggest Sending Money Directly to Overdue Bills

If you're not completely comfortable handing over cash or a check to the borrower — like to your deadbeat cousin Steven — suggest sending money directly to the overdue bills in question. Even just proposing this solution is a good way to gauge where the priorities of the borrower lie, especially where your money is concerned. (See also: Prioritize These 5 Bills When You're Short on Cash)

10. Don't Bring It Up Out of Context

This loan is between you and them; it's not between you and your sister and her husband and your hairdresser. You don't have to tell the whole world about it. Likewise, you shouldn't hold it over the borrower's head either. When a payment is missed, address it specifically in that context, not when you're out to lunch and your friend or family member orders a beer that could be used to pay you back instead.

11. Be Vigilant About Payback

Hopefully, since you have created a contract and repayment terms with interest, you won't have to hunt down your money and it'll make its way to you on time. But if that's not the case, stay vigilant about payback. It might seem like you're hounding the borrower every time you ask — because you are. Don't feel bad about it, either. They asked for money, and you let them borrow it, and now you expect to be paid back according to the loan terms. Anything less is unacceptable.

12. Never Co-Sign for a Loan or Add Them to Your Credit Cards

Lending cash is one thing, but co-signing for loans and adding them as an authorized user on your credit card is a whole other ballgame, and you absolutely don't want any part of it. It is almost guaranteed to be a disaster. If that discussion is on the table, swiftly shut it down. You're not the person for the job.

13. Offer to Help Get Them Back on Track in Other Ways

In addition to the loan, offer suggestions on how they can improve their financial situation. Do you have tasks around the house or office they can be paid to do? Can you teach them how to spend and save smarter? Do you have certain money-saving shopping techniques you can employ? Think of how you can impart wisdom to the borrow so they can help themselves more often. (See also: 20 Money Mistakes Everyone Makes But No One Talks About)

14. Don't Dip Into Your Own Savings

If you can't afford to fund a personal loan from your own disposable income, you can't afford it. Your savings are just that — savings for emergencies, a new investment, or, frankly, whatever you want. That's money that you've worked hard to build up, and you shouldn't let anyone take away from that. Politely explain the situation, and close the case.

15. Plan for the Worst

Lending money to family and friends doesn't always go as planned, which is why it's important to have a Plan B.

"Discuss the worst-case scenario and put a conflict resolution plan in place that you both agree on," suggests personal finance expert Chantel Chapman. "Things can get awkward when it comes to money, so planning out how you will handle a conflict if one does happen when you are cool-headed versus acting on hot-headed emotion will protect your relationship in the future."

16. Avoid Going Into Debt Yourself

What's the point of helping someone out financially if it compromises your own financial integrity? The only answer is that misery loves company, and miserable is all you'll be if you let someone start bleeding you dry with loan requests. Their problems are not your problems, and it's not your responsibility to fix them. If you're in danger of going into debt by doling out loans to friends and family, put a stop to it immediately. They'll find another way; moochers always do.

Have you ever lent money to family or friends? What are some of your dos and don'ts? Let me know in the comments below.

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