Money is emotional, especially if you’re lending it to friends and family! In this podcast episode, we discuss the pros and cons of lending money and guidelines to keep your relationships and finances healthy and drama-free.
Lending money changes the nature of the relationship
When you lend money to a friend or family member, your relationship changes. You are no longer just brother and sister, you are now lender and borrower. The person who borrows feels the weight of owing you money. If the person can’t pay it back as intended, they might avoid you, even if you’re fine with the delay.
You might also become extremely interested in their day-to-day finances, now that your loved one owes you money. You see them post a $7 Starbucks latte on their Instagram stories a week after you loaned them money to pay their rent! Beware that lending money can strain the relationship.
If you can’t afford to give it, you can’t afford to lend it
There is a possibility that you get $0 back from the person you lend to. And you must be okay with that! If the person doesn’t pay you back on time or at all, then what? Will you be late on your bills? Will it hurt your credit score? Maybe it’s not about the money at all. You can’t afford the emotional and relational consequences of the loan going bad. Don’t lend money that you wouldn’t have freely given.
If you’re loaning a significant amount of money, draw up a loan agreement in writing
This does away with misunderstandings if everything is in writing. Include the date the money was lent and the payback schedule. Will there be any interest? What happens if the person is late or misses a payment? Have both parties sign 2 copies and have a witness present. Treat it like a bank loan so you both are aware of the seriousness of the situation.
Co-signing a loan is NOT a better option
You might think it’s better to co-sign a bank loan than to lend the money, but you’d be wrong. Banks require cosigners because your loved one is a bad credit risk. When you cosign, you are both legally and financially liable for the entire loan amount.
Default rates on cosigned loans are as high as 75%! This means you will have to pay for it! If your loved one misses a payment or pays late, it will hurt your credit as well! One of my best friends from my college days cosigned a car loan for her boyfriend and it ended up causing her to file for bankruptcy. If you co-sign a loan, be prepared mentally and financially to pay in full… and not be mad about it.
How to Politely Say NO to Requests for Loans from Loved Ones
Make it a personal policy! Simply say, “I have a personal policy to never lend friends or family money.” If the person asks why, just say, “My relationship with you is too important for money to come between us.” (Kind of hard to argue with that!)
Don’t respond immediately – but give your answer within 24 hours. (I need to think about it. I need to talk to my husband.)
Be clear, concise, and nice. “No.” It’s a complete sentence! You don’t owe them a detailed explanation.
Don’t use the word “can’t” in your refusal. It implies that you want to help, but something is blocking you from doing so. Use “won’t” instead. Examples: “I won’t be able to give/ lend at this time.” “It’s not feasible in our family finances to help.” “We’re not comfortable co-signing for you.”
You are not a bad person for protecting and enforcing your healthy financial boundaries.
How to help out loved ones in need without lending
If this person is someone who’s usually very responsible and has fallen on hard times, then by all means, help them if you can. Offer to help in other ways, especially if this person is always in financial need. If you don’t feel comfortable lending money, you could pay for their groceries, pay a past-due utility bill for them, or offer to give them a ride to work. Go back and listen to episode 20 of the Money is Emotional Podcast, “Are You Helping or Enabling?” Consider setting up an Abundance Fund to help others with financial needs in the future.
Lending money is a sticky subject and your best bet is to avoid it altogether. Get your own finances in a strong and healthy place so you can give as you feel led, without strings attached!
Related: Becoming a Profitable Landlord