Pros and Cons Of Financial Lending To Family and Friends

There is an old saying along the lines of keeping friends and family separate from business. Shakespeare said it best when he wrote “Neither a borrower nor a lender be.” , which holds especially true when it comes to friends and family. Why not you might ask? Well that answer was also answered well by Shakespeare when he wrote “For loan oft loses both itself and friend.” since you often times lose not only the money loaned but also the relationship itself.

Loans to friends and family present a truck load of problems. Some of these problems you can address before they occur if you know what potential problems to expect. Of course avoiding these problems means communicating clearly ahead of time, before ever making the loan to said family member or friend. The following issues are things you might encounter if you decide to bite the bullet and loan money to a friend or family member.

Timeline:
When you lend money to friends or family they often feel entitled to pay you back at their leisure. Often times loans to these people do not have a set agreement ahead of time for a timeline of payments, just like loan terms from an actual lender. This leads to the lender not knowing when to expect any payments or the family member or friend not knowing when to make payments. To avoid this issue you should clearly define the terms of the loan. You should provide a schedule for repaying the loan.

Priority:
Your loan terms should have a clear cut deadline for repaying the money, or else you will quickly find you are not a priority when it comes to loan payments. Without such a deadline you are no longer any sort of priority with the person who borrowed the money. People often use the strength of being family or a “good friend” to skip on repaying the money lent to them. If you do loan to them you need to let them know it needs to be a priority, that non payment is not acceptable and have a clear cut deadline for repayment.

Trouble with talking about repayment:
Often times the one lending money to a family member or a friend finds it impossible to talk about missed payments or non payments. It sure can make family gatherings weird or a night out on the town with your close knit group of friends when you have lent a sizable amount of money and the other party has ducked out on payments. You need to grow a pair and take the time to talk to the one you lent the money to, the fact is they owe you money regardless if they are friends or family. You can of course be gentle about the topic, giving a vague gentle reminder about the loan without asking direct questions.

The money pit:

Once you lend money to this friend or family member they may indeed develop a habit of asking you every time they need money. You should go into any loan with them knowing this, and if it makes you uncomfortable you should clearly state that this is a one time deal. You do not want to become your family member or friends personal bank for life after all do you?

The best advice I can give you is to consider the possible strain that might result in loaning money to ANY family member or friend.
Can you deal with a financial loss if they make excuse after excuse about why they can not repay you? Are you willing to lose your relationship with said family member or friend if the loan goes south? If you can afford the loss of the money and feel confident that non payment will not affect how you treat them or your relationship then by all means go forward with the loan, but if there are any doubts it may be a time to give a gentle but firm “no” to any request to borrow money from from you. Wiser words were never spoken then by what Shakespeare wrote, “For loan oft loses both itself and friend.” You could always opt to cosign a loan for said family member or friend instead of loaning the money yourself that way if the loan goes south it is not just you on the hook, the creditor will also pursue avenues to recoup their money.

Author: Don

Covering the financial markets since 2005. Love to learn and share ideas and tips. The best articles come from ideas presented by users of this website. Topics that we find interesting include personal finance, credit cards (especially awesome balance transfer and rewards cards), small business financing and loans for debt consolidation.