4 Reasons NOT to Lend Money to Family and Friends

Dec 18, 2015
Shai Harary

loan money to family
Would you loan money to a family member or close friend?

I’ll bet you would – in fact, according to ConsumerCredit.com, 93% of respondents to a recent survey would loan money to a family member in need and 66% would float a good friend that’s fallen on hard times. In many ways, this makes sense – if you love and trust someone, and they you, then it feels much easier and safer than going out to an unknown third party.

The problem with loaning money to an intimate is that you are now co-mingling a business transaction – which is what a loan is – with a personal relationship.

And while I’m all for doing business with family, lending someone close to you money can always be a fast way to lose way more than you’d imagined if you aren’t careful.

The problems start when the focus is put on the behavior of the borrower. For example, let’s say you decide to loan your brother $10,000.00. It’s your bro, so paperwork detailing terms and timelines is overkill… right? He tells you he’ll give it back to you six months, so his word should be good enough… right?  And your brother is making himself vulnerable by even asking you. You relish the chance to help him. After all, he’s your little bro. You certainly don’t want to add insult to injury by asserting, “I will help you… but I need a written agreement and a lien against your house.” How insulting. No?

NO!

Six months passes, and now your brother needs more time. Or hems and haws whenever he sees you. Or worse – he avoids you, and like your money, it appears he’s now disappeared. No cash. No brother. Worst-case scenario, I know. But all too real.

When you focus on the behavior of the borrower (in this case, your brother) versus that of the lender (you), you’re missing the crux of the conflict – and the deal went awry because the lender decided not to call the shots, which was the critical misstep.

Think about it; would a bank ask you to dictate the terms of your loan?

Of course not!

And neither should you.

Here are some common mistakes people make when loaning money to family or close friends:

1) The lender sends the wrong message.
As I just mentioned, a borrower can request money all he or she wants, but it’s up to the lender to set the tone. Is this going to be a friendly transaction between two people where you lend someone X amount of dollars and are cool with that person paying you back when s/he can? OR do you honestly expect to get paid back in a timely fashion and are willing to impose interest or penalties if that timeline is not met. If the answer is the latter, then it’s on you to set the appropriate tone right from the outset by using language that is professional and specific, not loose and casual.

2) The lender doesn’t bother to get it in writing.
While it might seem awkward or even embarrassing to you or the borrower to get a promissory note or other written agreement, all I can say is this: get over it. This is a ridiculously common scenario and it happens all because the lender doesn’t want the borrower to think s/he doesn’t trust him or her, but the reality is it’s a business transaction, not a question of trust. If you think asking for paperwork is embarrassing, wait till you try to collect your money from a deadbeat family member or friend. Talk about AWKWARD.

3) The terms are too flexible.
Whether the agreement is verbal or even written, the idea of going easy or being “nice” to the borrower is another big mistake. Flexible terms, like not building in interest, being loose about a due date or vague about the structure of the loan itself says that the lender is not all that serious in collecting and further, that flexibility tells the borrower that maybe they don’t even have to pay it back. If that’s the underlying message, then what borrower isn’t going to take advantage of such overly flexible terms?

4) The channels of communication are either unclear or missing altogether.
Once the transaction takes place and as time goes on, it’s very common that the family and friends involved in the loan are loath to discuss it. There is a psychological component of feeling beholden to someone else, and then there are other more concrete issues like the borrower misses a payment or is overdue with the loan entirely. When the borrower doesn’t acknowledge the missing money, and the lender feels bad about asking about it, communication dwindles, and tension and resentment build because lines were crossed. The terms of the deal are now meaningless. If this continues to an extreme, then more than just the money is lost – a close relationship may also be over and out.

Now, this doesn’t mean that you can’t loan money to a family member or friend. It just means that like any other kind of business transaction, you must structure it in a manner that’s calculated to preserve the integrity of the relationship and to see that the loan is repaid.

For tips on how to do just that, tune in to the next edition of Street Savvy Lawyer!
Photo credit: taxcredits.net

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