Why You Should Never Loan Money to Family and Friends

Let’s NOT Loan Money to Family and Friends…

Posted on 10. Dec, 2008 by Kevin Geary in Finance

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I noticed an article come through my reader from Jim at Blueprint for Financial Prosperity about how to properly loan money to family and friends. I don’t want to knock Jim here as his site is great and he (usually) offers great advice, but I disagree because I don’t believe loaning money to anyone–especially friends and family–is a good idea.

This is one of those issues where you’re going to have to decide for yourself what you’d rather do. I personally think loaning money to friends and family is a big mistake, but people get away with it all the time. If anything, it’s a risk. And it’s one I’m personally not willing to take.

Loans ruin relationships

We’ll start out big. If you loan money to a friend or a family, they become indebted to you. Do you really want a “friend” or family member indebted to you? It’s not a good dynamic.

What if they don’t pay on time? What if they don’t pay at all?

Many times, when debtors don’t pay or the due date has passed and they realize they’re late, they become hard to find and hard to get in touch with. When it’s a friend or family member, this is especially true because they are ashamed. The shame comes from the position they’ve put themselves in (and you’ve helped put them in) and they’re inability to make good.

I can tell you based on personal experience that this ruins relationships. If you want to keep your friendships and family ties healthy, don’t loan anyone money.

Loans stress the debtor

Debt is bad. We’ve been over this. People borrow money because they don’t have the means to pay for what they want or need. Loaning them money often doesn’t solve this problem. A loan is a temporary fix (generally speaking) that gets a person through one situation only to land them in another.

When you loan friends and family money, they now have to find a way to pay that back. Another circumstance could come up that makes this difficult; it stresses their budget.

I don’t enjoy putting this type of stress on my friends or family.

Loans often enable people

Getting someone out of a bad situation is not always the best thing to do. If the person consistently makes poor decisions, doesn’t try very hard, or wastes money on stupid things because they have a spending addiction, lending them money actually makes their problem worse.

With family, you usually know exactly what’s going on and can (hopefully) figure out whether you’re enabling the person or not. But with friends, the line may be less defined. Since many people keep money and money-behavior private, you may be enabling a friend by loaning them money without even realizing it.

A better way…

I don’t loan money to people, but that doesn’t mean I don’t help them. If a friend or family member needs money, I just give it as a gift. I don’t want to put either of us in a position that could potentially harm our relationship.

If you don’t have it to give, then you don’t have it to loan out either. Giving is better all around than lending, so I choose giving.

Like I said, Jim is a great guy, but I just don’t agree with him on this one.

Please let me know your thoughts. Am I crazy for not “lending” a helping hand or do I have some legitimate substance behind my argument?

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Tags: Blueprint, Debt, dynamic, family, Jim, lending, loan, mistake, money, pay, prosperity, relationship, risk, shame, stress

7 Responses to “Let’s NOT Loan Money to Family and Friends…”

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Lin Burress @Telling It Like It Is

10. Dec, 2008

I agree with you. Loaning money to family or friends is a very bad idea.

There is a huge difference between helping and enabling someone, and the idea “help” comes in the form of loaning money to family or friends is ridiculous in most cases.

Having good intentions to help someone is one thing, but more often than not the Helper is really Enabling.

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Paul Williams @ Crackerjack Greenback

10. Dec, 2008

I completely agree with you. If a friend or family member asks for a loan and you want to and can help them, then give them the money instead of loaning it.

If they try to pay you back sometime, great-but don’t give in expectation of getting it back again. If they don’t, then at least you didn’t damage your relationship because of a loan default.

Family and (close) friends are more important than money. Loaning money to them is a great way to cause problems or awkwardness in an otherwise healthy relationship.

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jim

10. Dec, 2008

I agree that loaning money to family and friends is a huge mistake, but people do it… why not explain how to do it correctly?

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Green Panda

10. Dec, 2008

Loaning family and friends can be so stressful. You worry that you’re enabling some bad financial behavior.

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The Money Hawk

10. Dec, 2008

@ Jim:

Just because people do it doesn’t mean they should. I was just offering my opinion as well as an alternate option.

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