How to Lend Money to Friends and Family

In tough economic times, it seems as though everyone you know needs a little help. It can be hard, however, to figure out how to handle the situation when a friend or a family member wants to borrow money.

What should you do if a loved one asks for money? How should you handle the situation?

Don’t Lend to Friends and Family

One of the recommendations made by many is that you don’t lend money to friends and family in the first place.

If you don’t want to lend money to loved ones, you have two options:

1. Say No: You can say no. You don’t need to have an excuse, and you don’t need to be rude. It’s possible just to say, “I’m sorry, but I’m not comfortable  lending you money.”
2. Give a Gift: Rather than lending the money, you can consider giving it as a gift. In many cases, it can make more sense to just offer a gift, rather than expect to be repaid, it can make sense to just let the money go.

When you decide not to lend to friends and family, though, it’s important to be consistent. If you don’t lend to one, lending to another probably isn’t an option, unless you want even more relationship problems with your loved ones.

Make it a Business Arrangement

Another option is to make it a business arrangement. Some have had success with creating a contract, and putting together a payment schedule. Rather than waiting for the borrower to repay the entire loan at once, sometime down the road, you can set up a payment schedule that can be used to help the borrower manage his or her payments, and keep personal feelings out of it.

On the other hand, though, setting it up to be strictly business has its downsides. Even though you might try to keep personal feelings out of it, there is always the potential for resentments.

Can Money Damage Your Relationship?

The hard part of getting involved in any financial transactions is that money can damage your relationship. If you lend money to a family member or a friend, an awkwardness can interrupt. After all, if the loved one doesn’t pay you back, it can cause feelings of resentment.

However, if you decide to make it a gift, that can cause resentment in your loved ones. Many people become offended when they are offered a gift, rather than the option to repay you.

Of course, making it about business might not save the relationship, either. It seems impersonal to create a contract and make payments, and some family members are more interested in keeping things informal, rather than making a business arrangement.

The entire situation is difficult, because whether you say no, or whether you lend the money, there is a chance that you could strain your relationship. Money can damage a relationship if you aren’t careful.

What do you think? Do you lend money to loved ones? Why or why not? How do you handle the situation?

Image source: Jared and Corin via Flickr