Relationships

5 Simple Rules to Loan Money to Family and Friends

The rules to follow when lending money to your family and friends without losing your financial security and peace of mind.

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5 Simple Rules to Loan Money to Family and FriendsHave you been asked to loan money to a family or friend? I’m sure you have and a question has been on your mind. Should you loan money to family and friends?

Some time ago I was asked by a reader on how to respond to family members who were constantly asking to loan money. She cared for their wellbeing but it was beginning to take a toll on her relationships.

Our phroogie asked, “How can I say “no” to family who asks for money? I continuously get asked by different family members and extended family members for money because they assume I make a ton of money.”

This is a tough situation because there are family dynamics at play. For simplicity’s sake, you love them. And that feeling can often lead to irrational decisions affecting your finances.

Here’s the straightforward answer: it’s not your role to loan money to family or friends.

But that’s easier said than done. All because you care and love them and it might actually be an expectation to help the family at all costs.

She added, “I just learned to handle my finances a certain way that allows me to live a comfortable life. But, I find it hard to say “no” to my family [who] often never pay me back and I look like the bad person for asking for it back. So what can I do?”

What to do when family or friends ask for money

You can loan money to family. You can ignore them. Or you can tell them the truth.

With our phroogie, she’s been actively managing her finances to live a certain way. If she were to loan money that she needed back but doesn’t get repaid can hurt her long-term financial wellbeing.

What’s the consequence of putting your financial wellness at risk? You’ll end up being the person asking others to loan money.

There’s absolutely nothing wrong with helping someone in financial trouble. But, there is also nothing wrong with choosing not to loan money to family or friends.

If you’re no longer able to help, then it may be time to say no. And if your feeling stressed every time you’re asked, then it’s time to say no too.

In her award-winning book, Gold Diggers and Deadbeat Dads: True Stories of Friends, Family, and Financial Ruin, Valerie Rind shares compelling stories of people who borrowed and loaned money to family and friends and the proceeding turmoil that ensued. It didn’t look good on both sides. In fact, Valerie recommends you never ask or lend money to a family member (not even your partner).

How borrowing and lending money impact relationships

Have you ever asked a friend to loan money? Did you ever lend money to a family member? What were the outcomes of this financial transaction?

When money and family are involved emotions run high. Chances are your decision to lend money or ask for money is based on an emotional bond. And because it is influenced by our feelings, it has a very emotionally high association. Whichever side of the coin you’re on–borrower or the lender–things can, and often times will get complicated.

Dr. Brad Klontz recently wrote for Psychology Today how lending money to anyone can have the opposite effect.

Dr. Klontz writes, “Is this a one-off situation or is it part of a pattern? If it’s the latter, then loaning them money is probably not going to help. In fact, you might be hurting them. You may be financially enabling them. Financial enabling is giving or loaning money to someone in a way that supports their bad financial behaviors.”

Financially enabling them can reinforce the underlying problem.

And reinforcing the underlying problem means, you’ll be asked to lend money again in the future.

As I’ve written before, money is a tool. Think of it as a hammer. You can use it to nail a photo on a wall to enjoy. Or if used improperly that same hammer can punch a hole through the wall.

Sure the money you lend can help a loved one in need but it can also hurt your relationship with them. Here are my rules that’s helped me peacefully lend money to family or friends.

Rules to loan money to family and friends

1. Have a money philosophy

Have a money philosophy with guidelines to help you manage money effortlessly. Part of my rules is not lending money to anyone. Basically, if I need the money or expect it to be paid back, then I don’t have money to give. I give money when I can, not loan money.

2. Be clear and set realistic terms

If you’ve broken rule #1 and compelled to help regardless of your financial needs, then be clear about the loan. Set realistic terms and a deadline for repayment so that everyone understands. It’s necessary to write up an agreement and email a calendar reminder of the due date. This can remove the awkwardness of asking to be repaid.

3. Only give money

Simply put, if you can’t part with the money, then don’t loan money. Having a budget and financial goals helps you keep focused and on the road to financial wellness. That’s because you know each dollar has a purpose. Knowing that purpose can help you respond guilt-free to any loan money requests.

4. Set it free

It helps to intentionally let the loan go. You once had the money but now it’s free to be used however the new holder chooses. Constantly thinking about the loan or mentioning it to others will only cause anxiety. Free yourself from the stress of a loan collection.

5. Forget about the money

It will drive you nuts loaning money and then seeing family and friends owning things and doing things you can’t afford. Don’t share how you’ve seen pics of them do awesome stuff or buying nice things. When you loan money to anyone, they have the right to do anything with it. It’s no longer your place to tell them how to spend it. The only right you have is to say “no” to lending money to friends or family members in the future.

And if they happen to come again, you can assess your finances and their needs, and make a decision based on the new facts. You can also send them articles you’ve read and financial resources you’ve used (and found on this site) that helped you become their go-to money lender.

What rules do you have to loan money to family and friends?

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Jason Vitug

Jason is the founder of phroogal, creator of the award winning project Road to Financial Wellness, and author of the bestseller and New York Times reviewed book, You Only Live Once: The Roadmap to Financial Wellness and a Purposeful Life.
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