Pitfalls of Making Personal Loans to Friends and Family

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Pitfalls of Making Personal Loans to Friends and Family

Lending money to friends and family who are struggling financially can be a kindness, and a good way to help loved ones through a difficult time. It’s important, though, to think through the possible repercussions, both personal and financial, of such a favor. In particular, if the recipient fails to pay the money back as expected, your relationship with the person may suffer. You should think carefully, before you agree to lend the money, about which is the more important: the repayment or the relationship.

Bringing concerns about money into a friendship or familial relationship can be very difficult. It may be best to consider, at least privately, the money to be a gift. If you don’t expect to be repaid, then you won’t be upset or disappointed if you’re not, and there will be no damage to the relationship. On the other hand, if you are repaid, it will be a pleasant surprise. That means, of course, that it’s unwise to lend so much money that you will be in financial difficulty if it is not repaid.

Once you have completed the transaction, it may be best to simply forget about it. In particular, avoid the temptation to pass judgment on the recipient’s financial choices going forward. There is no surer path to frustration than to mutter, “He has the money to pay for that, but not to pay me back?” Once you lend the money, it becomes that person’s money to spend as he or she sees fit.

You should also be aware that the recipient may be feeling as stressed about the situation as you are, if not more so. You don’t want the person to feel unduly obligated to you, or to start avoiding you so as to not be reminded of the unpaid debt, which is another reason that you should never bring the matter up with the recipient, if at all possible.

To minimize the relationship risk of these kind of loans, consider encouraging the person to borrow money in a more conventional way, such as through a bank, but offer to co-sign as guarantor. By doing that, you make it largely unnecessary to discuss the matter with the person in the future, so long as they make their payments promptly, since the bank will be responsible for sending bills, sending notifications of late payments, and so forth. Of course, if they don’t repay the loan, you become liable to the bank not only for the full amount, but also for any interest and penalties that may have been incurred.

Of course, above all, the option always remains to just politely decline to lend the money — A true friend will understand.