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?

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