Is it Wise to Loan Money to Family and Friends?

Have you ever decided to loan money to a friend or family member? I’m not talking about the little $5 “I need to buy some lunch” loan here. I’m talking about the “I’m behind on my bills,” “My car just died,” or “My cat needs an operation” loan for hundreds or even thousands of dollars.

If so, how’d that work out for ya?

Did you end up getting paid back? Or are you still waiting for that money to somehow find its way back to you, maybe with interest?

When it comes to making a personal loan to friends or family, many people don’t realize how they can be fraught with problems that may not be obvious when you decide you want to make the loan.

Trust me, I speak from experience.

Why do we loan money to broke people?

When someone close is in need of help, it’s only natural to want to pitch in. Why is that? There are several reasons:

• We want to help. It’s natural to want to help someone we care about when they’re in a tough situation.  When someone is in need and we can help, it makes us feel good.
   
• We’ll feel guilty if we say no. You know if you don’t help someone who is struggling that it will weigh heavily on your conscience.
   
• You want to maintain the relationship. You feel like you can’t just refuse to help. After all, this is someone close to you. Not loaning money could cause tension in the relationship because you weren’t willing to be helpful in their time of need.

All of these reasons show that you want the best for that person and for the relationship. But what happens when things don’t work out as planned? What if they don’t pay back the loan (which happens more often than not, by the way)?

Worse yet, what if they make no effort to pay it back and then weeks or months later they’re showing you their expensive new clothes or the latest gadget they just bought? Do you think the relationship would change due to the resentment of not getting paid back?

When you loan money, relationships change.

When it comes down to it, lending money to friends and family rarely works out well because it changes the dynamic of the relationship. It goes from a relationship of family or peers to a relationship of creditor and debtor. That can get very uncomfortable when the loan never gets paid back.

Nobody wants that kind of resentment in their close relationships.

So how do you handle the situation when someone close comes to you and asks you to borrow money? The best thing to do is to say “no.”

But there are things that you can do in addition to saying no that can still be very helpful to someone in a tough situation. These can still allow the relationship to flourish despite your refusal to help with Fluffy’s surgery:

• Offer to give them the money. Only do this if you can afford to do without that money. That way there is no expectation of a payback and the resentment that follows when they don’t.
  
  However, I don’t think it’s a good idea to give them money if you know they have been totally irresponsible in some way and you don’t think they will use it to move forward responsibly. Bailing someone out rarely works, they need a behavior change.
  
  Don’t contribute to their stupidity, and don’t put yourself in a bad financial position trying to cure it.
   
• Offer Advice. If you’re good with money and know of a good solution to their problem without digging their debt hole deeper, then show them how they can work through the situation and come out much better on the other side by making a plan.
   
• Refer them to Peer to Peer lending sites. If they still insist on borrowing money to clear up their problem, there are several websites (such as Prosper.com and Lending Club.com) where individuals can borrow money from groups of people who contribute to the funding of the loan and you pay them back over time just like you would pay back a bank
  
  Think of it as a bank where thousands of people lend money to thousands of borrowers. Prosper and Lending club being the middle man that processes payments and provides the necessary documentation to make it all legal.
  
  Although I don’t recommend taking out loans, if they insist on doing so then this might be a good option when the bank and smart friends and family say “no.”

When someone that’s close to you comes asking for a loan, you should always remember that good relationships are much more valuable than money.

There will always be plenty of emotional arguments for wanting to lend the money, but in the end there are just as many ways you can help someone out without straining, or even destroying a meaningful relationship.

So resist the urge, and find a better solution without digging the debt hole deeper.

Ever loaned money to a friend or family member? Did it work out or not? Tell me about your experience in the comments.

Article originally published on Celebrating Financial Freedom. Used with permission.

Dr. Jason Cabler is a Christian personal finance blogger, author, and speaker. He teaches how to get out of debt and live a debt free lifestyle through his Celebrating Financial Freedom blog and self study course. His book How to Budget: The Quick and Easy Guide to Making a Budget That Works is now available (more info here). He can be reached for interviews or speaking engagements by email, and can be found on Twitter, Facebook, and Google +.

Photo courtesy: ©Thinkstock/Sergey Nazarov