• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar

Wealth Pilgrim

No Money Worries. No Matter What.

Neal Frankle featured in
  • Home
  • Life Insurance
  • Investing
    • Build Strong Investment Building Blocks To Avoid Going Broke In Retirement
    • Systematic Mutual Fund and ETF Investing
    • Stock Market Investing Guide
    • Choosing the Right Investment Brokerage Guide
    • How Bonds Work Guide
    • How Banks Really Work Guide
    • Annuities – What You Need To Know Before You Invest
    • A Beginners Guide To Buying Individual Stocks
    • Create A Pool Of Great Mutual Funds and ETFs To Pick From To Secure Your Retirement
    • ETF and Index Fund Investment Guide
  • Earn More
  • Banking
  • Retirement Planning
    • Retirement Guide
  • Ask Neal a Question
  • Reviews
    • Upgrade Personal Loans Review
    • Lending Club Review
    • Prosper Review
    • Ally Invest TradeKing Review
    • CIT Bank Review
    • LegalZoom Review
    • Lexington Law Review
    • Airbnb Host Review
    • Should You Drive For Uber?
  • Tax
  • Courses
    • Raise Your Credit Score So You Can Buy a House – Free Video Course

How To Loan Money To Family Without Losing Both

by Neal Frankle, CFP ®, The article represents the author's opinion. This post may contain affiliate links. Please read our disclosure for more info.

goingoutofbusiness_84125193

Lending money to family is rotten idea. If you can find a way NOT to do it, don’t. Of all the financial mistakes I’ve ever seen, loaning money to family or friends is probably the biggest.  When your brother in law comes to you looking for a bail out, point them in enlighten them about the alternatives.

Lending money to family can create a great deal of financial stress. It can tear families apart. In fact, this almost happened to me.

Right after I got married, I loaned a small amount of money to someone in my family (since most of the people in my family read the blog…let’s leave it at that). When I made the loan, the person who got the money thanked me. I told him not to mention it. Unfortunately for me, he took my advice. He never did mention it again, nor did he repay me. BAH!

When I confronted him after a few years, he told me that he considered the money a gift and as a result, felt no need to pay me anything. Rather than create a huge rift, I wrote it (and him) off.

But I learned a few very important lessons about making loans to family members.  Here are the essentials you can use to avoid the trap I fell into:

1. Don’t loan money to friends and family if at all possible.

If you need to make a gift, then do so. Even if the recipient assures you that payments will be coming, think of this money as a gift. Believe me, you’ll live longer this way.  On the other hand, think this through carefully.  Sometimes you do other people a huge favor by turning them down.  If someone is in debt and you bail them out, what’s to stop them from getting into trouble again and again?  Nothing.  If someone has a debt problem, you might want to help them fix it but that doesn’t mean you can do that by writing a fat check.

2. If you simply must make the loan, at least get the terms in writing.

I don’t care how much you trust this person. I don’t care if you are loaning money to your brother-in-law who saved your life by donating his lung to you — get it in writing. And while you’re at it, have all the spouses sign as witnesses to the agreement. This is crucial. You don’t want anybody to misunderstand. This is a loan and it must be repaid.

4. Even if you don’t care about making a profit, charge interest and get monthly payments starting now.

This move is to further communicate to the recipient that this is a loan, not a gift. It also helps your cash flow. Also, you must charge the minimum rates set forth by the IRS. If you don’t, the IRS will consider this a gift and that could trigger tax consequences. You can find the IRS minimum rates by going to Google and pasting in these key words: IRS Applicable Federal Rates Table 1. (It’s a pdf and it gets updated weekly so I can’t post a link. Sorry).

If you end up making the loan, chances are you had no choice. I get it. Don’t feel bad.

If you are lucky enough to lend the money to someone who actually pays you back (please don’t hold your breath), you’ll probably get more in interest than you could had you deposited the money in the bank.

I’m not a fan of making loans to friends and family. (Can you tell?) I’ve had bad experiences. And I don’t know anyone who has had a good experience.  The best you can hope for is to come out even.  Am I the only one who got burned? How about you? Make me feel better. Share your war stories with me. Please…

 

Tweet
Pin
Share4

Reader Interactions

User Generated Content (UGC) Disclosure: Please note that the opinions of the commenters are not necessarily the opinions of this site.

Comments

  1. Dean says

    March 6, 2009 at 7:37 AM

    Hey, me again. I have loaned money numerous times to my son-in-law. Same experience, he acts like it was a gift; we even put it in writing once, which made no difference at all. He knew I wouldn’t take my daughter and grandkids down by doing anything. He still tries, but not much anymore and whenever it comes up, I just remind him of his track record. I think he now knows better (so do I).

    Reply
  2. Rene says

    February 28, 2009 at 12:45 PM

    I follow this one train of thought when it comes to loaning money to anyone….don’t EVER loan money that you really need paid back…consider it a gift to that person and IF you get paid back…..nice! If you NEED the money….you should not be loaning it out!

    Reply
    • Neal says

      February 28, 2009 at 10:27 PM

      I completely agree. Thanks!

      Reply
  3. Diana says

    February 27, 2009 at 4:37 PM

    You’re absolutely right! Especially lending or “helping out” your kids. Comes a time you must force them to stand on their own feet, not your wallet. If you don’t, it will never end. Take it from one who knows!

    Reply
    • Neal says

      February 28, 2009 at 11:02 AM

      Thanks Diana. Well said…

      Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Are You Human? * Time limit is exhausted. Please reload CAPTCHA.

Primary Sidebar

Who is Neal Frankle

Neal Frankle

I'm a CERTIFIED FINANCIAL PLANNER™ Professional with more than 25 years of experience. I feel very blessed and hope to share my personal financial experience and professional wisdom with readers of WealthPilgrim.
Read More »

Stay Connected

Facebook Twitter YouTube RSS

More Categories

Career Development
College Funding
Credit Cards
Credit Score Fixes
Money and Marriage
Debt Relief
Estate Protection
Property Investment Loans
Small Business Strategies
Spend Less Money

Disclaimer

Wealth Pilgrim is not responsible for and does not endorse any advertising, products or resource available from advertisements on this website. Wealth Pilgrim receives compensation from Google for advertising space on this website, but does not control the advertising selection or content. Please do the appropriate research before participating in any third party offers. The information contained in WealthPilgrim.com is for general information or entertainment purposes only and does not constitute professional financial advice. Please contact an independent financial professional for advice regarding your specific situation. Wealth Pilgrim does not provide investment advisory services and is not a registered investment adviser. Neal may provide advisory services through Wealth Resources Group, a registered investment adviser. Wealth Pilgrim and Wealth Resources Group are affiliated companies. In accordance with FTC guidelines, we state that we have a financial relationship with some of the companies mentioned in this website. This may include receiving payments,access to free products and services for product and service reviews and giveaways. Any references to third party products, rates, or websites are subject to change without notice. We do our best to maintain current information, but due to the rapidly changing environment, some information may have changed since it was published. Please do the appropriate research before participating in any third party offers.


About · Contact · Disclaimer & Privacy policy

Copyright © Wealth Pilgrim 2022 All Rights Reserved