Loaning Money to Friends and Family Responsibly

“Desperate times call for desperate measures.” We all feel the weight of this when it comes to COVID-19, but a pandemic isn’t the only time where our friends and loved ones are in financial straits.

It’s not uncommon for those who are in financial hardship to ask for personal friends and family for loans. Many find themselves with a strong opinion on both sides of the argument.

“YES! Help your friends and family. They are in need, and you should always help those in need.”
“NO! You should never loan money to your friends or loved ones. That can make things very complicated.”

If you’re somewhere in the middle, or if there are certain circumstances where loaning money to a loved one is called for, we have some tips to make it easier as well as safer for you.

Establish Expectations
As you would do with any type of loan, you should always set expectations as the loaner. Questions to ask:

  • “What is the money going toward?”
  • “How do you plan to pay the money back?”
  • “Are you expecting interest to be added?”

There should be no room for assumption. Ensure that all loans are clear and put into writing.

Don’t Lend Money You Don’t Have
You should never lend someone else money if it puts you into financial trouble. You never know when circumstances may change, so ensure that the money you loan out will not be missed if an emergency arises.

Don’t Judge
If you have decided to help with a personal loan, keep your conversations strictly about the loan itself. Not everyone who is in financial hardship wants to be taught budget lessons or be told that their financial management skills are up to par. If you are asked your opinion, of course, you’re welcome to share, but do not offer unsolicited advice along with your loan.

Be Vigilant and Consistent about Payback
Just as a bank follows up when a payment is missed, so should you. Don’t use phrases such as “I hate to ask,” or, ‘I’m sorry to do this.” Kindly remind the borrower that you entered into an agreement, and your expectation is they will hold their end of the bargain.

In times such as these, compassion and kindness can go a long way. However, you should never feel guilted into a situation you’re not comfortable with, especially when it comes to finances. Be smart, and remember the decision is ultimately yours.