Should You Loan Money to a Friend or Family Member?

Five critical considerations

Posted Sep 30, 2019

What do you do when a friend or family member asks you for money? Do you give it to them? Do you refuse?

Be careful because the answer to this question could threaten your relationship. When money changes hands it can put a relationship at risk. As such, loaning money should be done with caution if not avoided altogether.

The real question is this: What circumstances have led to the need for a loan? Was it something totally outside of their control or are they just bad with money? Would you be supporting a pattern of financial mismanagement or financial dependence?

Is this a one-off situation or is it part of a pattern? If it’s the latter, then loaning them money is probably not going to help. In fact, you might be hurting them. You may be financially enabling them. Financial enabling is giving or loaning money to someone in a way that supports their bad financial behaviors.

Your support might solve their current financial stress but it could unintentionally reinforce the underlying problem.

So how can you tell if your financial help is likely to just make matters worse? The answer is simple: The best predictor of future behavior is past behavior. If the person has a history of financial struggles, your financial help may be encouraging more of the same.

Sometimes people need to hit a bottom before they realize they need to change. Your financial support could be part of the problem that is keeping them stuck. So avoid loaning money to someone with chronic financial problems.

If you decide to lend money to someone, here are five critical considerations. 

Consideration #1: Understand That You’re Taking a Big Risk

Loaning money changes a relationship. You’re no longer just a friend or family member. You are now a lender and they are a borrower. You have changed the balance of power. How are you going to feel if they don’t pay you back? If they can’t pay you back, how will they feel?

Awkward. They might start avoiding you. You might feel resentful. So be careful!

Consideration #2: If You Can’t Lose It, Don’t Lend It

If this is money you need, then don’t loan it. Someone who loves you would never want you to put yourself in financial jeopardy to help them. If you loan money to them they are going to assume you can afford it. If you need the money to meet your own financial obligations it would be irresponsible for you to lend it.

Consideration #3: Be Clear About Conditions

If you’re going to move forward with the loan get clear on the conditions. When will they pay you back? Set a date. Will it be in installments or a lump sum? Decide upfront. If the loan isn’t paid back by the deadline, what are you going to do? Put all of this in writing.

Consideration #4: Let Go

If you are loaning or gifting someone money, you need to do it without trying to control what they do with it. Otherwise, you are setting the stage for possible resentment. For example, let’s say you loan a friend $500 because she can't pay rent. A week later you see her on a shopping spree at the mall. How are you going to feel? If you are going to be upset then rethink making the loan in the first place.

Even though your financial support puts you in a position of power, it’s unfair for you to think that your support gives you permission to judge what they do with it.

Consideration #5: Be 100% Okay With Them Never Paying You Back

If you can’t be okay with gifting them the money then maybe you shouldn’t loan it. In the end, you won’t be able to control whether or not the person pays you back.

So the only way to guarantee you can keep your interest in the relationship is to be okay with them not paying you back. That doesn’t mean they won’t avoid you, but at least you can keep your feelings clean on the matter.