Basic rules for lending money to friends and family
If you’ve ever watched an episode of “Judge Judy,” you know that lending money to a friend or loved one can have disastrous results.
More than 3 in 5 American adults (61%) have taken out a personal loan or paid a group expense in hopes of reimbursement, according to a recent survey by CreditCards.com. Among them, 59% reported a bad experience, in the form of losing money, harmful relationships or even physical altercations.
“In general, my feeling is that it’s not a good idea to lend to family and friends,” says Ted Rossman, senior industry analyst at CreditCards.com. “The data shows how often this goes wrong. Feelings are hurt and credit ratings are hurt.”
Still, you might be tempted to help someone in need, especially in today’s tough economy.
Here’s how finance and etiquette experts say you can lend money without hurting your finances or your friendships.
Making a personal loan puts you and the recipient of your money in a tricky situation on two fronts. If they don’t pay you back, you could find yourself in a financial bind. And even if you don’t urgently need the money, defaulting on repayment could lead to hurt feelings or uncomfortable tension on both sides.
To avoid all that, follow these three expert tips.
1. Loan what you can afford to lose
“The No. 1 rule of thumb if you’re lending to a friend, family or an enemy is to make sure it’s money you can afford to lend,” says Thomas Farley, a financial expert. label and author “Mealtime with Mister Manners” column on Today.com.
This ensures that you don’t make a potentially troublesome scenario worse by putting financial pressure on yourself. “Put on your own oxygen mask before helping others,” says Rossman.
One way to make sure you’re not overstretching yourself is to treat the loan as a gift, at least in your mental register. This way, you won’t get upset if your friend or family member refuses to repay.
“Any money you get back is a bonus,” Rossman says.
2. Put everything in writing
If you’re lending a large sum of money (and not, say, to cover a restaurant check), having a written agreement is “essential,” says Farley. “It doesn’t have to be something a lawyer writes. Just a simple promissory note.
The document should ideally include the amount of money you lent, the date you lent it, and expectations for a repayment schedule.
“You’re not necessarily going to enforce the document to the point of suing someone,” Rossman says. “But when these things go wrong, it’s often because of a lack of communication.”
3. Communicate early
It is essential to be as upfront as possible about any money you hope to recover. Nearly 4 in 10 Americans (39%) say they would leave a $100 debt from a friend or family member unpaid rather than try to collect it, according to the CreditCards.com survey.
That’s probably because a lot of people don’t want to bring up a tough subject with a loved one, Farley says. But it will be easier for all parties involved if you bring up an awkward subject as soon as possible, he says.
That doesn’t mean you have to start haranguing someone as soon as you get a check. But checking in early can save a lot of hurt feelings.
“The longer you let it go, the more they’re going to forget they even owe you,” Farley says. “And the pettier it will seem when you’re trying to collect.”
If it’s taking longer than expected to get your money back, remember that this person contacted you because they were having financial difficulties. As long as they make an effort to pay you back, you can allow them some flexibility in the timing or amount of their payments.
“Be empathetic,” says Farley. “But don’t be a doormat.”