Lending Money to Friends and Family without Ending the Relationship

by Neal Frankle, CFP ®

When I first got married and starting off in business I found myself in a tight spot.  Even though I hated doing it, I asked a friend for a loan.  Fortunately, we able to pay my friend back shortly after he advanced us the money.

A few years later, that same friend asked me to lend him $3,000. We had misgivings because our friend Lenny ran hot and cold and was often irresponsible with his finances.  We weren’t at all sure that we’d ever get our money back.  Still, my wife and I felt obligated to return the favor he had done for us.  Can you turn someone down who needs your help and who helped you in the past?

We talked to our friend Lenny and set up a comfortable payment plan. Len actually made the payments for about three months. But shortly thereafter he stopped making the payments and didn’t return our calls.

We knew he had problems. He maxed out his credit cards and was in a real bind. But the situation still upset us.  The amount he borrowed was significant, but it wasn’t enough to put us out in the cold. His behavior, on the other hand, put a frost on our friendship that has never thawed. I see this happening all the time…don’t you?

What could my wife and I have done differently in order to have preserved our relationship with Lenny? Anything?

Here are some options I’ve come up with:

1. Since we knew from the get-go Len wouldn’t likely pay us back, we should have been honest. We should have either given him the money as a gift or not given him the money at all.

This would have been difficult to do for two reasons:

a. Our last name wasn’t Gates…we couldn’t afford a $3,000 gift.

b. We just couldn’t bring ourselves to refuse Len after he helped us.

2. We could have discussed our fears from the get-go.borrow from friends

Since we knew that Len would have difficulties paying us back – even under the very relaxed repayment plan – we could have discussed this issue from the start. I think this step would have relieved the pressure and possibly allowed us to salvage the friendship. Maybe we should have referred him to peer to a peer lending company as an alternative (for more information, see my Lending Club review).

3. We could have asked for collateral.

Again, this one would have been difficult…but doable. We may have gotten our money, but if we would have seized his property or taken him to court the relationship would have ended anyway.

4. We could have told Lenny that we have a “No Loans To Friends” policy.

This would have been super hypocritical because we violated that policy when we asked him for money years before.

Even though my wife and I made the loan never really expecting to see the money back, it hurt. Moreover, Len probably felt ashamed of himself. He found excuses to separate himself from us even though we eventually told him that we had forgotten about the entire thing.

The best solution I’ve worked out is to never borrow money from friends again. This way, I can invoke the “no loans to friends” policy and stick to it. Would this approach work for you?

My sense is that even if the person who borrows money from you pays you back, debt between friends sets up a weird dynamic that is very hard to survive. Somehow, the relationship is never the same.

Have you ever found yourself in a similar situation? Have you felt obligated to loan money to someone knowing full well you’d never see that cash again? What impact did it have on the relationship?

email

Subscribe & Get Your Free E-Book and E-Course as My Gift to You!

Investing Your Money Made SimpleOnce a week you'll get unique tips to make smarter money decisions about your investments, retirement, taxes, and career. You'll also get encouragement and ideas to help you get out of debt, earn more money, and generally stop worrying about your money.

Neal Frankle is a Certified Financial Planner™ with over 25 years experience. Subscribe today and tap into this wonderful, free resource!

Become a Fan! Follow @NealFrankle

{ 20 comments… read them below or add one }

SELENA October 6, 2012 at 6:17 PM

I found this conversation about lending money very timely b/c I was searching for a personal loan online or anyone who could lend me money and happen upon this website. After reviewing very one’s comments, I concluded that I would help some in need if I were in a position to. I recently had the daunting task of ask a friend/client for a loan. It was not a good feeling and I still owe her and plan to pay her back the $1,000 I owe her but it’s a burden b/c I don’t know when I have it b/c money still is tight. The money did help a little however; I was in need of financial assistance. So I set up a donation site. Posted it to my Facebook page and quickly was made aware that no one is going to make a donation to me. So I closed it down a few days later along w/ my Facebook page. Who needs those losers…LOL.
I said all this to say, after being in direr straights, I had to reexamine my assumptions on borrowing and lending money and what would I do if asked.
First, it’s not an issue for me, if I have it. The questions is would it be a loan or a gift. After reading some of the comments here, I can honestly say my answer is to make sure I had it to give and whether it be a loan or gift and how it would affect me financially. Every situation is different. Someone might be in need of all you have. So it would be a judgment call for me and them to see what your limitations are on giving. “I can give you or let you borrow only this amount”.
The bottom line is, I would make every effort to help a family or friend if called upon. This conversation just helps me understand the conditions as to how I would go about it.

Reply

Deanna April 25, 2012 at 5:25 PM

I see this is a very old post, but I just found it while doing a web search. I am a financially stable, single woman, age 38, with excellent credit, who made a recent decision to loan a man a signficant amount of money. I am very concerned at how distant our friendship/relationship has become and would love any honest advice!!! (I dated this man for five months before I offered this.) I’ve been teaching for fifteen years, give a portion of each paycheck to a 403B, don’t have any credit card debt, and own a home. I also bring in regular income from a part-time waitressing job, free-lance musician gigs and clinician work in my field (leading workshops, etc.) If I didn’t trust him and he wasn’t special to me, I would never have considered or offered this (yes, it was my idea). I didn’t have any money saved to loan him, but I was able to help him pay off a very high interest loan of his, by moving the debt onto a credit card of mine, that had a 0% offer. When the offer was up, I moved the debt to a loan on my 403B that has a very low interest rate. I set up free paypal accounts for both of us, so he simply sends me a payment through paypal online each month. He doesn’t have access to any of my accounts. I make all my payments myself & he simply sends me a payment each month online, so we never have to discuss it. I knew I would be fine financially even if something happened and he never paid me, so I offered to do this to help him raise his low credit score. (He was not as blessed to have parents like I did, that helped me establish credit.) He has paid me every month & I send him an updated spreadsheet/receipt/invoice each month. I am just very sad because I had NO idea that this would result in such distance between us. At first, he was shocked I offered & it was very awkward for me to discuss at first, but we agreed that this would need to be like a “business transaction.” He agreed that it was awkward to talk about, but said, “I just don’t want it to compromise us hanging out.” Well, it has. Our loan began seven months ago & we haven’t “hung out” in six months. This saddens me. I told myself that if I really cared about him as a person & for his well-being, than I can’t let any personal thoughts (what he thinks of me as a possible partner, etc.) affect my decision is doing what I think is best for him. I fully understand that God’s in control, but I would love to know if there’s anything I can do to help him feel better about this and just forget that this payment he makes online has anything to do with me as a person/friend. I would very much appreciate any insight or advice.

Reply

Neal Frankle April 25, 2012 at 10:48 PM

What is your specific question?

Reply

Geno February 4, 2010 at 8:18 PM

Great post, sorry to hear about others negative, and some positive experiences.

One of the most important aspects of borrowing and lending with friends and family is to protect the relationship.
The easiest way to protect the relationship is to increase the likelihood of borrower repayment.
The most successful way to accomplish this is by (1) ensuring both parties agree to the terms of the loan, (2) getting everything in writing, and (3) receiving assistance from a 3rd party.
We’ve started http://www.LendFriend.me to meet this exact need, hopefully we can help you also.

Reply

Neal September 14, 2009 at 7:11 AM

MTSC,

How did you do it? What is your secret? I’m going over to check out your post right now.

Reply

aby Mathew June 30, 2009 at 5:53 AM

As the great Warren Buffet says

” You should never give more than what you can afford to lose”

” Never put all eggs in one basket”

” Never test deep waters with both feet”

” Nobody but YOU can manage YOUR money better than others,
If you get 1000% returns on you money , just think yourself as an ‘early bird’ in a huge PONZI scheme”

” There is nothing like free money, Even if you win a lottery of 100 billion $, you still have to buy the ticket”

Reply

Bible Money Matters June 23, 2009 at 9:21 AM

I think when you lend money it automatically creates a power relationship – there’s a bible verse that says the borrower is slave to the lender – and this is really true. When you borrow you are indebted to the person you have borrowed from, and the dynamics of the relationship change. It’s better to give money as an outright gift, or not to lend at all. Personally, i don’t lend to friends or family. If I do give them money, it’ll be as a gift with on strings.

Reply

Neal June 23, 2009 at 7:19 AM

Evan,

Your story is inspiring to me – probably a function of the way you approach your friends and it’s admirable.

I agree that friends are meant to help each other…but they are also meant to be honest and responsible to each other. Depending on the situation, I think the relationship could survive. In my case, I found out later that my friend had spent money supporting an addiction rather than his family or paying me back. That was it for me.

Reply

Julio June 23, 2009 at 6:50 AM

The “no loaning policy” is the way to go. Don’t think I would be able to mind my own business if I see the recipient of my loan squander it and that is not a position I would want to put myself into.

Reply

Evan June 23, 2009 at 12:20 AM

Yep. I’ve loaned money and had it not repaid. The relationship survived.

I guess it all comes down to the kind of relationship that it is. I find it sad that some relationships can’t survive these kinds of things – but it doesn’t help to pretend that they can if they can’t.

Friends are meant to help each other I think. I would like for money to not dictate to us the terms of our friendships. Unfortunately I think that sometimes it does.

Reply

McLaughlin June 22, 2009 at 7:19 AM

Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
This above all: to thine own self be true,
And it must follow, as the night the day,
Thou canst not then be false to any man.
William Shakespeare, “Hamlet”, Act 1 scene 3

Reply

Monevator June 18, 2009 at 2:11 AM

Very true words. I’ve seen the same situation happen when I’ve got involved in minor business work for friends. Invoices that never got paid, and some sort of feeling that despite agreeing a fee and it being my daily occupation, it didn’t need to be paid anyway.

The sums involved were much less than yours, but the friendship still floundered on the rocks. I felt sort of used I guess.

Very tricky territory.

Reply

Neal June 18, 2009 at 6:10 AM

Another excellent point I hadn’t even considered. It seems like it’s not the amount involved so much as the way the exchange is handled that creates the friction.

Thanks M!

Reply

chuck June 16, 2009 at 9:27 PM

Wow, what a dilemma.

At one time, when I was in deep financial trouble, a good friend offered to loan…maybe actually he said GIVE…me money. I turned it down, because I think the answer to your question is no, you can’t lend, borrow, give or take money from a friend without it hurting the relationship. Just knowing I had a friend like that, however, was a great boost, and I will never forget the offer, but I’m sure glad I turned it down.

On the other hand, I did give money, I think it was $3000, to a relative in need. He didn’t ask for it, but my wife and I offered it because we knew he needed it. He paid it back in a very short period of time.

I guess you have to write it off, but Len sure has some bad karma to work off. I think the idea of work for $$ is a great idea. I really appreciate the questions you pose, and the answers your readers supply.

Reply

Neal June 16, 2009 at 10:43 AM

SJ’s idea is pretty compelling……

Reply

SJ June 16, 2009 at 10:37 AM

I haven’t loaned any substantial money to any of my friends. I think there’s a select few that I would feel comfy loaning money to… but at the same time I think I’d be fine just gifting it to them.

I think I’ll just attempt the no loaning policy tho

Reply

Neal June 16, 2009 at 8:57 AM

Barb….a great suggestion. It never occurred to me to suggest that my friend could have worked the debt off….. DOH!

Reply

Barb June 16, 2009 at 8:43 AM

I have a number of friends that have the “no lending, period” perspective, after having been burned a few times in the past.

Recently, I loaned a small amount ($300) to very close friends that are struggling right now, with the idea that they can pay me back what little they can when they can. And if they never can, that’s ok, too (they were uncomfortable with me making it a “gift” outright).

I never lend money that I “MUST” get back (kind of like not gambling if you can’t afford to lose it all). I’ve found that if the relationship is a close one on sound footing, sometimes the money owed can be paid back in other ways (dog or house or baby-sitting, physical help with house projects like building a fence or deck, etc.)

Reply

My Journey June 16, 2009 at 6:30 AM

Neal,

You could have used an online service (I don’t have the links on me but I think it is virgin Money) whereby you fund his loan, but after that it is out of your hands if a collection agency or similar entity goes after him.

This way you are playing the good guy, while performing good CYA methods.

Reply

Neal Frankle June 16, 2009 at 6:59 AM

Wow…. I didn’t even know about this. Of course, I don’t know if such a company existing when this happened between my “friend” and I but this is great information MJ. Thx

Reply

Leave a Comment


6 + seven =

Previous post:

Next post: