“Neither a borrower nor a lender be.” 

Polonius in Shakespeare’s Hamlet knew that lending money to a friend or family member often results in the loss of both the money and the relationship.  But when someone you love is in a serious bind and you have the means to help it can be impossible to say no.

So what do you do when someone asks if they can borrow some money?  Take the time to consider your answer.

Related: Home Equity Line Of Credit: Friend Or Foe?

Deal with cash only

Don’t apply for a credit card in your name for someone else to use.  Consider carefully if you are asked to co-sign a loan.

Never put yourself in a position where someone else’s actions could affect your ability to secure credit in the future.

Prepare for the worst.  Only lend what you can afford.  Are you willing to forgive the debt if it’s not repaid?  Can you afford to give the amount as a gift?

Get full details

Find out what the money is for.  Is it an emergency, or the result of poor spending decisions?  If the friend or family member becomes offended by your questions, take that as a red flag.

Related: Why Do We Save?

How well do you know the person?  Is it someone you’ve known for a long time, or a new friend or relationship?  Are they responsible and trustworthy, or a moocher?

Does the person have the means to reimburse you?  Try to evaluate their money situation.  What other avenues have been sought?

Discuss terms

Talking about money with loved ones can be awkward but you need to be clear about your expectations.

Discuss the repayment plan while everyone is friendly and anxious to make this work.  Don’t leave the loan open-ended.

A small loan could be repaid in full by next payday or if a lump sum is expected shortly.  A larger sum may need regular payments to be made.

Related: Quick Cash Solutions – A Dangerous Game

Get it in writing

A verbal agreement might be considered legally binding, but it still comes down to your word against someone else’s – even someone you trust.

It’s difficult to ask for money back when you don’t want the borrower to feel awkward but you don’t want to worry about when you’ll be repaid, either.

For large loans, a promissory note outlines a reasonable repayment plan.

Many websites (like this one) offer free promissory note forms that you can print out and fill in the blanks.

Will you charge interest?

What will happen in the case of late payments, – or no payback at all?

What about collateral?  Something of the perceived value of the loan amount could be held until the loan is repaid.  If you decide to add your name to the registration of a vehicle or house it would be a wise move to set it up with a lawyer.

Distance yourself

Deal with problems with late payments right away if necessary, but once you’ve agreed to lend the money it’s no longer in your control.  Don’t obsess about how it is spent.

Related: Why Gadgets And Travel Are Today’s Status Symbols

You don’t have the right to inspect chequebooks or make lifestyle judgments (“You’d have money if you quit smoking!”) or try to manipulate the person.

Consider the impact

Lending to one family member or friend and not another could impact relationships and cause conflict, especially if they see favoritism or enabling behavior.

Make sure your spouse is on board with the decision or it could result in considerable stress if you are lending family money.

Consider what will happen if you die before the loan is paid back.  Will the loan be forgiven?  Still owed to the estate?  Or subtracted from the beneficiary’s share of the inheritance?

Just say no.

If you’re not comfortable with lending money to friends and family, it may be in your best interests to decline the request.

Don’t feel guilty or pressured or beat around the bush.  Don’t keep the asker hanging – respond in a timely manner.

“I’d love to help but I’m not in a position to lend you money right now.”

Perhaps you can help in some other way, or find other options.  Trust your instincts.

Final words

Sometimes relationships trump traditional money sense.  Make sure you’re being smart about it.  Being too trusting or forgiving may be admirable but it can also lead to being taken advantage of, even by someone who has the best intentions.

Don’t become the go-to lender in your circle of family and friends.  Once you’ve lent money that person may ask again or others may also ask for loans.

Don’t dip into your retirement plan or plunder your emergency savings.  What if you might need the money in the future?  No one knows what tomorrow holds.

If payments are irregular, then sporadic, then occasional, expect that the nature of your relationship will change – it will never revert back to normal.

Money can drive apart friendships and family relationships.

RelatedDo You Play Dumb About Your Personal Finance Knowledge?

Try to make lending money a positive experience for the people involved.

Have you ever lent money to a friend or family member?  Or, were you a borrower?

How did that work out for you?

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17 Comments

  1. Jane Savers @ Solving The Money Puzzle on May 1, 2013 at 5:57 am

    I am the consigner on 2 student lines of credit for my sons who are in university. As a single mom I can not afford to help them very much and this was the only way to get them through school. They both have jobs and government loans but we still came up short.

    They will both have degrees in areas will help them secure employment. I am not sure if I would have signed for a philosophy or general arts degree. I am also confident they will pay.

    • Boomer on May 1, 2013 at 2:12 pm

      @Jane Savers: I have also cosigned loans for my sons and lent them money. There were a few late payments but overall I trusted them to repay their debts – and I wasn’t disappointed

      • Jane Savers @ Solving The Money Puzzle on May 1, 2013 at 6:11 pm

        I have threatened to live with them when I am older if they don’t make the payments. That should be enough to keep them current on all payments.

  2. Bryan on May 1, 2013 at 8:55 am

    Don’t lend more than you are willing to lose. Personal loans are treated differently by friends and family. They may say loan, but in reality might mean “gift.”

    • Boomer on May 1, 2013 at 2:17 pm

      @Bryan: I agree that many times you have to prepare for the worst case scenario – not being paid back at all.

      Often the problem with lending money to friends and family is the open-endedness. People think they can make payments “whenever” because there won’t be the same consequences as say, a bank loan, but that can cause a lot of awkwardness.

      • Joe on May 1, 2013 at 2:58 pm

        Exactly. You have 100% of the power before you give them any money. Use the power responsibly to ensure they understand their obligation to repay the money and undertake the necessary preparations to ensure they will, e.g. a signed contract, and like somebody else said a lien against a vehicle, etc. The biggest red flag, like you mentioned, is if they get hostile. If they are trying to bully you into giving them money, then they are the ones abusing the relationship not you.

  3. sr on May 1, 2013 at 9:31 am

    I’ve got two loans out to casual friends, both have written agreements. One has a lien against the car, the other has an agreement that I can go to court to garnish wages if two payments are missed, at my discretion. I am earning more than 3x the amount of interest I can get at ING, which is the best I could find on simple savings. I trust these people and understand why they could not come up with the money on their own. I was asked by a third casual friend for a loan and said no, because I saw that her situation was poor money management. She was planning a trip down south while desparately looking for $3000 to pay outstanding property taxes so her name would not appear in the paper. It seemed that having her name appear in the paper was the big concern. Just did not feel that she would feel really obliged to pay me back, given that she was maxed out everywhere despite having a high paying job.

    Anyway, the rates I am charging are half what the other two were paying elsewhere, and good for me too. It can work.

    • Boomer on May 1, 2013 at 2:21 pm

      @sr: With written agreements and charging interest (and being selective about who to lend to), it seems as if you are handling this well and to the benefit of all parties.

  4. Ken on May 1, 2013 at 11:47 am

    Luckily I have few friends or family so I don’t get hit up with any requests. But if I was the answer would be a flat no.

    I would consider just giving some scratch to a deserving sod if I believed in their cause, such as for education or something that was not a money pit.

    And I WOULD THROW in a copy of an epistle on money management. You want money, then get to work.

  5. KC on May 1, 2013 at 1:08 pm

    I am one of those people who borrow from my father but have always repaid him back.

    The criteria was always what it was needed for whether it was deductible for my car accident (happened at time when I launched my business with all my savings invested into it) or for educational assistance or simply to pay my rent when I lost my job unexpectedly (hard lesson learned).

    We talk openly about our finances and have a good relationship so we’re definitely the lucky few. No interest and repayments were to be made whenever I had the funds.

    He had to co-sign for my car loan only because I had a 5-year credit history (but had very good credit history) which wasn’t considered long enough for a good history (load of bs in my opinion as I had no other debts). Verbal agreement was if I fail to make my payments, I am to sell the car asap.

    I’m obviously the lucky one but it helps when you have a good rapport and on the same page re: financials.

    I have loaned some money to a friend once only b/c she exhausted all options and it was for a legitimate reason. We drew up a contract with minimal interest. She managed to bounce back and repay me in full ahead of schedule and we’re still good friends to this day. I have had others ask me but I declined as they had poor money management but refused my help to assist them. That was a red flag right there.

  6. LoonieLover on May 1, 2013 at 1:54 pm

    @ sr
    Question: Does your third friend know about the loan to your other two friends? It’s your money to do with as you wish, and from what you describe here, I agree with the logic of your decisions, but I’m wondering how the third friend would react if she knew about the other two.

    Also, just me being nosy, but did you tell her why you weren’t comfortable lending her the money?

  7. sr on May 1, 2013 at 6:20 pm

    Hi Loonie Lover, one of the two that got a loan does know the one who did not. However, I know she is discreet and am not concerned that she would say anything. If she does, well, that’s how it goes. I think the one I did not loan to would be able to figure it out on her own. I asked her a lot of pointed questions about how she got into this situation, and how was it that she had not paid her taxes for however long, yet she would be able to make payments to pay me back?

    I do not care all that much if she finds out and I would be happy to tell her point blank if she asked why I lent to the others but not her. I really would be happy to tell her. She was ballsy enough to just fb msg me asking for 3000 bucks, so I think she could handle it.

  8. Bet Crooks on May 1, 2013 at 6:30 pm

    No one has asked us for money yet. Maybe they look at how we live and figure we’re the ones who need the help!

    I wouldn’t loan without a written agreement, but if I thought it was really a gift that might get repaid or might not, I wouldn’t be as worried about putting it in writing. I hope to be able to help our children with loans when they are old enough to fledge. That’s a bit too far ahead to predict yet.

  9. sr on May 1, 2013 at 7:38 pm

    I’ll tell you what else. I felt really good the time I was downtown and recognized the guy I gave the car loan to, driving in the safe, used car that he wanted for his family, with a little hat with a pom on the top showing in the window of the passenger seat.

    And as for my other friend, she could not get a housing loan/mortgage for the kind of home she wanted, which was a yurt on a rural property in the Yukon. So, she was paying 10% interest on a vacation loan. The bank knew exactly what the loan was for, but said that was the best they could do for her take it or leave it. She took it, but paid it off with her loan from me.

    Both are making payments via e-transfer, like clockwork. They are paying me 5%, and there was no charge for setting up the loans, ie, for the contracts and paper work. Something I would consider in the future though, especially for registering liens.

  10. wkg on May 3, 2013 at 4:48 pm

    I work with a guy who lent his father in law 130k to start a business, business failed, no recourse.

    I personally lent roughly the same amount of money to a sibling trying to “help out”. I am now less one sibling and 140,000.00

    Don’t do it, signed note or not, don’t even think about it

  11. Shafi on May 4, 2013 at 9:22 am

    Never sign as cosigner. You are asking for trouble. Debt is color blind. Debt knows no prejudice.

  12. Ciceron on May 6, 2013 at 12:46 pm

    A few years back, I borrowed about 13k$(8k+5k) from my sisters to complete a down payment on a duplex. I had a sizable down-payment, but not quite 20%+other costs (this transaction was not eligible for mortgage insurance).

    We wrote an agreement and amortization schedules (5 and 10 years) and had it signed by a third party witness. I paid them interest half-way between savings and mortgage rates.

    I managed to pay them back in full after one year, instead of the 5-10 years we agreed upon.

    Last year, one of my sisters asked for the favor back (she also decided to buy a property ineligible for mortgage insurance). We agreed to the same terms. Up to now, she made all the payments and is looking for a flatmate so to have enough money to pre-pay us.

    However, my partner lent 5k$ to a sibling, so he could reimburse his father and pay his bankruptcy fees. Four years later and he only paid back 100 $. A total disaster.

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