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The pitfalls of lending to family and friends

So you brother is struggling to make his car payments, or your niece just needs some more money to tie her over to the end of the month. Sound like a familiar story? It sure did to us. At the start to the month we had two situations pan out that we are going to share with you today. 

*For privacy reasons names are omitted*
Chris and I had been talking for a while on how to approach the situation with family member 1. When they got married just under 2 years ago Chris lent them some money but they took this to be a 'gift'. About a month later he lent them some more money this time they had acknowledged that it was a loan. We decided to let the first money go (though a very generous wedding gift, we wrote it off as that) but then the second lot we didn't want to write off as it had been clear to both parties it was a loan. 

We finally contacted Family Member 1 and asked what his plans for repayment were and that we were willing to accept instalments.  The response shocked us, they said they thought we were in no rush and that us doing this would make things really tight for them as they have a child. This situations highlights how easy it is for communication to break down over something like this as further disagreements have stemming from this have lead to a rift in the relationship. 

The second situation involved Family member 2 booking a holiday last minute with his girlfriend and in-laws and being completely unable to afford it. He asked for help with his bills, but the reason he can't pay is because of his holiday. Our first thoughts were of frustration, knowing that if we lent we would be essentially funding his holiday.

These situations occurring really reminded us of why we now both feel it is not appropriate to be lending money to family. There are just too many pitfalls to justify it. Below are just a couple of reasons why family and lending don't mix well and what other alternatives may be better.

1. It isn't always clear if it is a loan.
Usually lending between family and friends is very informal and unlikely to comprise of any written documentation. This can lead to misunderstanding as to whether the money given is in fact a loan or simply an outright gift.

2. No set terms
It is not unusual for there are not set minimum monthly payments, no set time period, no interest and no collateral. The informal nature and lack of terms can lead to the borrower feeling far more relaxed about repayment than the lender may expect. By not loaning in a matter comparable to a bank its is realistic that the borrower may not also behave how they would when borrowing from a bank. If a loan is open ended it can mean it is not a priority for the borrower to pay it back especially as there are no 'real' repercussions i.e bad credit score. It can also mean that you are not on the same pages as to what a reasonable time frame would be.

3. It puts a strain on a relationship
It makes situations awkward, it causes frustration and annoyance, and can lead to the breakdown of relationships. The dynamic changes, there is a burden that is owed yet you might not be treated in the same manner a professional leder would. This can impact your overall relationship and how you view each other especially if one feels the other is acting unreasonably.

4. Recovering assets is challenging
Not being paid back is not an all that uncommon situation, and you don't hold the same power as a bank to act quickly and cheaply. You are unlikely to have taken collateral for the loan. Recovering assets via county court is a time consuming process and though pretty efficient it would be better to avoid the situation altogether.

5. Enabling a habit
Once you have lent once, it is not unlikely you will be asked again. But is isn't a great position to be in if you are constantly lending especially if the loans are not interest bearing. Each time you continue to lend you are enabling a bad money habit. You are a quick fix not a long term solution. Try finding ways that can help rather than facilitate, consider why they are finding themselves in this situation perhaps they don't know how to budget or have a gabling problem.

So what to do instead of loaning money? Offer something more practical and not furling a money issue. For the brother who is going on holiday we have offered to work with him on making a budget and debt snowball. Whilst with the other brother cash gifts no longer occur instead individual items are bought I.e nappies so that we know it is going on needs not wants.

What experiences had you had with lending to family and friends?


  1. Ugh, that's so unfortunate that turned out like that! I know I borrowed a very large sum from my grandmother to go to grad school and when she gave me the check, she didn't say anything. It was me who volunteered a date the repayments would start, how much I thought I could afford each month and how long I thought that it would take me to repay her (about 2 years). I can't imagine not having that set out clearly.

  2. Whenever we are talking about lending money to a family member, regardless if we are clear that it is a loan, we basically acknowledge that we are "writing" it off as a gift. It can get frustrating if that family member doesn't pay you back or they continually ask for money. I find it helpful to refer them to a money blog or give advice versus offering a "money gift". Money and family can be a tough relationship!

  3. Those are all very good points about why loaning to family and friends is generally a bad idea. I was recently in the position of having a family member ask for money, and while I did make the loan, we have all the terms and repayment schedule in writing. I also made it clear that there would be no additional loans. This certainly doesn't guarantee me my money back (short of going to court), but this family member also accepted my financial advice and I'm hoping that they will be able to get back on track with it. One more pitfall is that if you don't get your money back you may have financial troubles of your own, and that's why you should never loan any money you can't afford to lose.

  4. I certainly find that lending to friends or family to more trouble than it is worth. I've pretty much decided that I will never provide money to friends or family that I am not willing to see as a gift (or that I am not willing to lose in the end). Then, if it comes back, great. If not, I'm not disappointed or in a bind.

  5. Great post! It is always sketchy to lend money to family and friends. We have made it a pattern not to lend money to family and friends at all because we have gotten burned multiple times. I think is a really great post! Thanks for sharing!

  6. I haven't had any experience but I've had friends who have. My take is that you don't start something you cannot finish. Ask for what is owed back and if it's not forthcoming, write it off as a bad debt letting family know there and then that it's a gift that'll never again. Continue as normal and if they(the borrower) decide they no longer wish to have a relationship - I'm afraid it's their loss.