Why You Should NOT Lend Money to Friends and Especially Family

I have lent money to friends and family members and neither situation worked out very well. But, I learned a lot from both experiences. Most importantly, I learned that I’ll never loan money to friend or family member again, for the reasons outlined here. If you’ve already decided to loan money to someone close to you, here are some tips to help you mitigate some potential areas for communication breakdowns:

To thine own self be true, neither a borrower nor a lender be.” These famous words, SOME OF THE WISEST AND MOST IMPORTANT EVER SPOKEN, came from Polonius, Shakespeare’s chief counsellor to King Claudius in Hamlet. As Polonius (who is often belittled in the modern day as a probably demented old “fuddy duddy” gives some fatherly advice to his son Laertes, Shakespeare gives some timeless advice to us: Do not lend money to friends.

Why shouldn’t we lend money to friends and family? Polonius (Shakespeare) answers that in his next line: “For loan oft loses both itself and friend.” Shakespeare knew that a loan to a friend or family member often results in the loss of both the money and the relationship.

In fact, loans between family members or friends can result in an entirely unexpected set of problems. Consider the following ten reasons not to lend money to friends and family, and some tips to help you with damage control if you do agree to loan money.

1. Open-ended Loans

Loans to family and friends tend to be open-ended. The parties don’t reach an agreement for a timeline for repayments, and don’t include interest on the loan. Lenders don’t know when their money will be returned, and borrowers don’t know when to repay the loans.

This leaves both parties in limbo, and doesn’t set any expectations. The uncertainty can lead to stress as the borrower may worry that the lender expects payment and the lender worries about when he or she will be repaid. The first time I loaned money to a family member (to buy a house for his nuclear family) it delayed and limited my ability to go into business, for myself. The second time meant I was unable to go on any camping or fishing trips that year

Tip: If you must lend money to a family member or friend, provide them with a timeline and a schedule for repaying the loan. The timeline provides a final deadline for total repayment of the loan and the schedule provides them with guidelines for making monthly payments. For example, “John, I’m happy to lend this money to you, but I’ll need the money repaid by December 31st. If you can pay me $200 every month, the loan will be paid off by the end of December.”

2. Loans Are Never a Priority, to the Borrower

With an open-ended loan, the borrower may not realize that there is a sense of urgency to repay the loan. Without a deadline, repaying the loan becomes the borrower’s last priority. The borrower won’t face any repercussions for not repaying the loan, like late payments, higher interest fees, or a negative impact on a credit score. Without the threat of penalties, the borrower has no motivation to take the loan seriously or to put any urgency around repaying it.

Pro Tip: Talk with your friend or family member and let him or her know that repaying this loan needs to become a priority. Set a deadline for repayment to avoid any misunderstandings.

3. It is Difficult to Ask for the Money Back

It can be difficult to request repayment of a loan from a friend or even a family member. Family might and often do have a feeling of ENTITLEMENT-that the money is or should have been a GIFT. More than likely, the lender cares about the borrower, and doesn’t want the borrower to feel awkward. The lender may continue to worry about loan repayment, and thus shut down some or all communications with the borrower in order to avoid talking about the loan. The borrower becomes confused and hurt feelings can result.

Tip: If you have already lent money to a friend or family member and struggle with asking for the money, take the time-IF, THEY ARE NOT HIDING- to talk to the borrower to resolve the situation. When I had a difficult time talking to my family member about paying back a loan, I offered gentle reminders about the loan instead of asking direct questions. This made the discussions easier and less threatening.

4. It Can Make Family Gatherings Awkward

I have loaned money to family members, but I have never borrowed money from a family member. After the first time, family get-togethers became very awkward, even my relationship with my mother suffered (the money was loaned to her second youngest brother). It was also uncomfortable to be around other family members who knew about the loans.

No one wanted to talk about the loan, or about money, or even about anything that costs money; because then people might wonder why that other someone hasn’t repaid the loan.

Tip: You and the other party came to a private agreement about the loan. Neither party should feel uncomfortable, but if family gatherings seem awkward, keep things light hearted and steer conversations away from money realestate or anything else of material value.

5. The Borrower Becomes a Servant to the Lender

It is fairly commonly known that I do not believe in any commercial organised religion, including Christianity, however, the book of Proverbs in the Bible claims that the borrower becomes a servant to the lender (Proverbs 22:7.)

Tip: As a lender, I didn’t think of my borrower as a servant to me, and I certainly didn’t want my borrower to feel that way. If you think the borrower feels subjugated, try to help ease his or her discomfort.

Now, Here are Five Reasons Even Your Friends Will Never pay you Back:

1. They never planned to pay you back in the first place. Emily Post, the mistress of manners, offers up this cardinal rule of lending things to friends: Don’t lend out items you really care about. In other words, don't ever plan on ever seeing that borrowed item -- ahem, money -- ever again.

2. You're being way too nice. The polite thing to do, if it's a small amount of money, is not to make an issue out of it at the risk of hurting the friendship. If you're out with a friend, when bill arrives, say, 'Is it okay to put that $10 toward my tab? Then it is nonthreatening," Bring it up once but don't harp on it. In other words, being a pushover is often a hidden cost of being good true friend.

3. You're not using robots to do your dirty work. Your friends are ignoring you because it's easy to do that. So use technology to do your dirty work and save yourself the mental anguish. The free app Venmo, now available for both iPhone and Android phones, can help you collect debts from your friends or even family. The app allows people to make and receive payments to and from each other -- for coffee, drinks, babysitting, whatever -- for free—that all too common catchword.

 It will even send reminders to those who are overdue on their bills. Or, ask for a card swipe. On the downside, mobile payment companies like Square and PayPal take a small percentage of the payment for processing fees. On the plus side, the technology tracks the repayment and even emails both lender and borrower a receipt

4. The loan never happened. Here's some free legal advice: Get it in writing. If it's a large amount of money -- several hundred dollars or more -- a loan gone bad can effectively kill a friendship. But for the lender, that slip of paper can do something else: It could provide evidence for a write-off on taxes should the borrower default. IOUs can be as informal as an email or something more official like a legal contract.

5. Your friends know you won't break up with them. If you have friends who borrow stuff and don't give it back, then you have a different problem: either bad friends or bad boundaries.

Here is a common scenario: a friend , a “single mother” asks you for money for a loan “to pay the rent ant to buy groceries. She promises to pay you back as soon as she can. Being the loving and caring friend that you are, you immediately loan the money, after all,  it will come back, in due time. After all, you’ve known your friend for years and trust him. You couldn’t and wouldn’t expect any less.

But as the months go by, you still don’t see a dime come back. You are nervous about asking for the money, but you really need it back. Yet, you don’t want to harm the relationship.

So what do you do? How do you get your money back and maintain the friendship? Here are nine ways to deal with a friend or family member who won’t pay you back.

Ways to Get Your Money Back from a Friend

1. Offer Gentle Reminders
Sometimes this is all it takes. Perhaps the person has so much on their mind that they forgot about the loan. Consider sending an email or visiting him. If your friend or family member has a good sense of humour, make a joke out of getting your money back. Humour can lighten the mood. However, make sure you communicate how important it is to you to be repaid.

2. Suggest a Payment Plan

If your friend wants to pay you back, but cannot pay the entire lump sum at once, suggest a payment plan. Sit down with him and write out the terms and conditions for the payments, including how often and how much. Establishing structure to the loan will benefit both of you. When deadlines are clear, it’s easier for your friend to be held accountable to them.

3. Offer to Help Figure Out Finances

If your friend or family member is willing, help him review his finances. If he does not manage money well, suggest that he make a budget or help set it up. In this way, you both can see how much he can afford to pay you back each month. Suggest the envelope budgeting system if it looks like he is having a difficult time staying within budget.

4. Barter

If it seems like he will never have the money, consider a different approach. Trade a specific amount of work around the house or in your yard for what he owes you. Or maybe you own a business and could use some extra help there. This can be a great way to let him off the hook for the money, but still get something of value in return.

Try this approach out first, however. If your friend is horrible at housework and you trade for an hourly amount, you may not feel like you got your money’s worth – which could leave lasting resentment in the relationship.

Alternatively, if he has an item that is roughly equivalent in value to what he owes, tell him you’re willing to wipe out the debt if he’s willing to part with the item.

5. Hold a Joint Garage Sale

If your friend or family member is unable to pay you back and is very tight on both money and time, ask him if they would donate some of their things towards a garage sale. The conditions would be that you get the entire profit, but they would be free of the debt. It’s best if you first approve, and then take charge of pricing and selling the items, so you don’t feel ripped off.

6. Get Collateral

If your friend or family member truly wants to pay you back, but lacks the discipline to do so, ask for collateral. Something he won’t want to do without, like a TV or iPad, can be a good choice. You are not to return the item until he pays you back. Such an action gives him incentive to pay you back sooner and proves to you that he genuinely intends to follow through with the promise.

7. Visit in Person

Perhaps your friend or family member is avoiding you because he knows you want your money back. If he doesn’t respond to emails, texts, or phone calls, visit him in person. Be kind when you visit. Show him that he can’t avoid the situation and offer suggestions that he can implement to pay you back.

8. Have Them Pay for You

If you are on friendly terms, ask your friend to pay for you each time you go to lunch or the movies. This could be an easier way for him to pay you back, and it might be a nice perk for you as well.

9. Gift It to Them, Family, Often Just may not be Worth Putting Yourself in the Grave Over.

If never getting the money back isn’t going to ruin your life, consider gifting the amount. You’ll probably feel good about it and then you can move on. Giving is great for the soul and allows you to be a good steward with your money.

As for the gift, there is a slim possibility you can deduct it on your taxes, but it depends on the scenario. The loan would need to be set up as and considered a true loan turned non-business bad debt. More than likely, you will not be able to count the gift as a tax deduction, but I recommend contacting the IRS or checking out their website. These sorts of gifts are closely scrutinized, and depending on the value of your gift, you could even end up owing gift tax. Gifts in excess of $13,000 are liable to be taxed and the donor is the one who pays this tax. Gifts for charitable contributions, for medical or educational expenses, to a political organization, or to your spouse are not assessed this tax.

Maintaining a Good Relationship

Loans can ultimately sour relationships, and many friends and families have fallen out over this issue. Here are some ways to deal with the relationship as you are attempting to get repaid.

1. Be Patient and FORGIVE

Try to be as understanding as possible. This person may not be as financially responsible as you and may need some guidance to pay you back. Use the situation as an opportunity to help your friend develop financial responsibility. Do your best to not get bitter over the money. If the person doesn’t pay you back, let him know your frustrations, but ultimately forgive him and move on. In the end, it will save your relationship and keep you from being an angry person who lost a close friend.

2. Think About How Much Your Relationship Is Worth

Is your relationship with this person worth a hundred dollars? A thousand dollars? A million dollars? Is it priceless? Keep that in perspective as you continue to deal with the situation.

3. You Can Only Control Yourself

You are only capable of controlling your own actions. If this person does not pay you back, that is on his shoulders and not yours. Don’t let it bring you down or ruin your life. Ultimately, it is a learning experience for both sides.

Final Word

It is often not a good idea to loan money to friends or ESPECIALLY family members. However, if you’ve already done the deed and find yourself dealing with it, make the best of the situation and use the tips above to try to get your money back and save the relationship. Chances are, your friend doesn’t feel very good about the situation either, and if they’re avoiding you, that’s probably why.

Help them help you is the message here. Have compassion, and whatever you do, don’t condescend because they owe you money. Deal with your ego if you think this position makes you better” than they are. They will pick up on these feelings which could harm the relationship irreparably.

Have you loaned money to friends or family members? What was your experience like? Have they paid you back-- YET?