3 True Loan Stories: How to Lend Money to Family & Friends

Giving out a loan is always a dicey proposition. After all, once you lend the money, there’s no guarantee it will be repaid.

The stakes are even higher when we lend money to our friends and family — or even cosign a loan — because we not only risk our hard-earned money, but we also endanger important personal relationships. Many people refuse to lend money to friends or family for precisely that reason.

I’ve lent money to friends or relatives on only a few occasions, and I am happy to say I’ve never been burned — but there are certainly lots of people who have.

Here are three true stories I want to share with you about loaning money to friends and relatives.

True Loan Story   1

Shortly after the Honeybee and I got married, she got a phone call from a girlfriend who was in a bit of a financial jam. Her car was in the shop, she was completely broke, and she needed $200 to cover the bill. And without the car, she had no way of getting to work.

Making the situation more dire was the friend was a single mom who had a couple of young kids.

When I came home from work, the Honeybee explained the situation. Of course, being the heartless bastard that I am, the first question out of my mouth was: Why doesn’t she have an emergency fund? I know.

And to be honest, under the circumstances I resented being put on the spot.

At the time, the Honeybee and I were just starting out — and we were sacrificing. We were eating lots of macaroni & cheese and rice & beans to ensure we spent less than we earned. Matthew was still a baby, and by the time we were finished paying the mortgage for our new home, the car loan, and all our other bills and obligations that come with being financially responsible — like saving for retirement — there was very little money left for discretionary spending.

In fact, back then our entertainment budget was a paltry $25 per week, so I hope you can understand how I felt when we were being asked to loan a friend $200.

Anyway, after a lot of thought, we raided the money from our savings to make the loan.

Two months later, we got our money back.

True Loan Story 2

After ten years of battling the elements, the wooden privacy fence surrounding my property was on its last legs. I insisted on replacing it with a block wall, but one neighbor balked at the idea because he didn’t have the extra $2000 required to replace his half of our wooden fence with the better-quality block variety.

So, to break the stalemate, I offered a $2000 interest-free loan where he would pay me $100 per month until the loan was retired.

My neighbor agreed and I drew up a payment schedule that he signed. I then paid the contractor to build the block wall.

I’m happy to say my neighbor never missed a single payment and the loan was paid off on time and without a single hitch.

True Loan Story 3

An out-of-town relative of mine who was struggling a bit financially — let’s call him Mike — made it known to the family that he was looking to buy a truck for his business.

One day, Mike’s mom, Donna, found an unbelievably great deal on a truck and told Mike about it. Unfortunately, Mike said he couldn’t scrape up the $18,000 that the truck’s owner wanted.

So the mother and son came to an agreement: She would buy the truck — with some inheritance cash she had just received — and her son would then pay her back over several years. After Mike agreed to a monthly payment plan, his mom bought the truck and then gave him the keys.

Three months later, Mike stopped making the promised payments.

Incredibly, somewhere along the line he also managed to dupe the DMV into getting the pink slip transferred over to his name.

A couple years later, Mike sold the truck. Even so, Donna never received another penny from her son.

Is she bitter? You bet.

The Smart Way to Loan Money to Family & Friends

When friends or family say they’re in a financial bind and need a loan, our natural inclination is to help, but that doesn’t mean we always should.

I always ask myself two very important questions before loaning money to friends and family:

  1. Can I afford to make the loan?
  2. Am I willing to let bygones be bygones if I don’t get all the money back?

As I see it, when I can’t honestly answer “yes” to both of those questions, then I have no business loaning the cash out in the first place. But when I can, then I’ll take the plunge.

That way, if I do happen to get the money back, then I’m rewarded with an unexpected bonus. And if I don’t get the money back, well, it’s c’est la vie — although I promise it would be the last penny they’d ever see from me.

Fool me once, shame on you. Fool me twice … well, that ain’t gonna happen.

Photo Credit: Steve Snodgrass

Comments

  1. 1

    Fubar says

    Just want to say great blog stumbled on it last week

    But as for loans it always amazes me how easy friends and family will fall out over not repaying money they borrowed

    A few rules to think about

    Don’t talk about how much you earn or how much money you have saved, You will just open yourself up to people knowing you’re the person to ask to borrow money from

    If they know you have money because you have nice house etc.. just make out all money is tied up in investments

    Friends and family i have lent money to i always say the same thing to them

    “If you fail to pay this loan back or mess me about avoiding me, phone calls you will never see another penny from me again regardless of the situation”

    Happy to say i have friends and family i have lent money to and they have paid back without fail, and if they where going miss a payment they have phoned me and explained why and i am happy to lend to them again

    But i did have one friend who borrowed money to fix his car and then avoided me and all my calls etc…

    It was only £150 but i have seen him since and he is struggling financially if he paid that money back i would helped him again

    But he knows if he asks the answer will be no

    Also they say money is evil it does cause problems best bet is to not loan them the money

    • 2

      Len Penzo says

      What amazes me is how some people can take advantage of their family’s generosity without any hint of remorse.

      That behavior reveals a lot of about one’s characters — and not in a good way. So I can understand when slighted family members decide to disassociate themselves from the oaf that took advantage of them.

    • 3

      BV says

      “Don’t talk about how much you earn or how much money you have saved, You will just open yourself up to people knowing you’re the person to ask to borrow money from”

      I suggest you change all your friends immediately. Sounds like you have terrible people around you OR you think everyone is out to get you…. I am not joking!

      Whilst my friends don’t need to know my financial situation in depth, I have no problem telling them what I earn etc, and would never assume that then I’d be open to that sort of request…

  2. 4

    says

    I generally have the same rules as you. I also have a third question – do I think this person will truly even try to pay me back? Because not getting paid back because of crappy circumstances would be one thing, but if I was the mom you mentioned above (Donna), I would be beyond pissed.

    My biggest risk was in college when I loaned $200 (which was about a fourth of my savings account) to a new coworker I didn’t know very well at all. She just started, the accounting department accidentally missed paying her on time (they didn’t put her in the system), and she needed half of her rent that week. It ended up taking them another month to get her paid completely, but she immediately paid me back. My soon-to-be husband thought I was sweet but nuts that whole month…

    • 5

      Len Penzo says

      I take your third question into account when I am considering my second question.

      And I would have taken the risk you took too, if only because she was a coworker and the odds of her stiffing you would seem like a remote possibility. At least to me!

  3. 6

    Paul N says

    This question was on another financial website recently and generated over 100 responses. All I can say after skimming over some of the comments is there is no real answer to this. Go with your gut feeling. Loan what you feel you can lose without hurting yourself. Always remember in both cases, you make the loan and you don’t get paid or if you say NO from the outset it won’t be the same between you anymore….

  4. 8

    says

    I ahve only loaned money to my children who are now adults. I never had a problem and was always paid back. I do not think I will ever loan money to others because I hate to ask for it.

    • 9

      Len Penzo says

      I’m with you. One of the reason I keep an emergency fund, rainy day fund, and mad money savings is because I don’t think I could ever get the nerve to even ask for help.

  5. 10

    says

    Yes, I do. I only give money that I could afford to give and …well you got it; I didn’t say loan either. There is always the possibility people won’t pay back. But I have always admired Socrates and he said: ‘There is a sun in each of us, it only has to be allowed to shine.’. If I dicover there is no ‘sun’ then I decide what to do and whether to continue the firendship.

    • 11

      Len Penzo says

      There is no doubt that giving is the ideal solution, Maria, for those who can afford to do it.

  6. 12

    says

    I have loaned money to friends. Some have paid me back, others quit talking to me when I started asking for the money back. My wife and I talked about this recently and we decided to not loan anyone money anymore, even the friends that were good about paying us back. It is just too risky.

    • 13

      Len Penzo says

      “…others quit talking to me when I started asking for the money back.”

      How do people live with themselves after stiffing a friend or relative on a loan?

      Thus, the importance of only loaning the money out if you convince yourself you are willing to let bygones by bygones if the loan isn’t paid back! For me, the height of that hurdle is, for the most part, directly proportional to the size of the loan.

  7. 14

    says

    I have the same two rules as you but an additional third rule. If you don’t pay me back this time this is the last loan you’ll ever get from me. That way even though I’m not expecting to get paid back, if I don’t, I never have to loan them money again. I can tell them why and they’ll know I’m right so there won’t be a huge argument. :)

  8. 16

    Olivia says

    We have a relative who seemed to always be in crisis. We and other family members helped her out many times (gifts). Then one time we just couldn’t. She got mad. Gratefully, my husband spoke to her and explained very calmly we weren’t “rich” we were just very very frugal. It was a wake up call. She since found a way to take online courses towards a degree and hopefully upon graduation will get a decent paying job.

    • 17

      Len Penzo says

      That’s great! Your hubby is a better person than I am, Olivia. If I had a relative who got mad at me because I couldn’t help them out (after numerous times I did help out) I think I would have said some, er … very undiplomatic things.

  9. 18

    ELAINE says

    I have learned this lesson the hard way DO NOT LOAN TO ANYONE FOR ANY REASON

    my one brother has finally started paying me back every week on the $8000 he owes me

    the other brother owes $3000 and hates my guts! completely ruined our relationship (he is very very bad with money and his life is in shambles)

    another relative took years to pay back the $2000

    but now everyone knows not to even bother asking after i made it clear that i don’t work hard and live a frugal lifestyle to help you b/c you live beyond your means

  10. 20

    Joe says

    I have learned it is better to give than to lend and it costs about the same. Been burned a couple of times myself so I learned the hard way.

  11. 21

    Oscar says

    My uncle has the best stance on this: he never, ever, ever lends or gives money to someone asking for it, always saying his motto: “Give a man a fish and you feed him for a day. Teach him to fish, and you feed him for life”

    And he practices it: when someone comes asking for money, he will ask that person to sit down, explain their situation, and then try to explore other alternatives. He has found temporary work for several people to make the money they needed; he has arranged garage sales and initiated fund raisers. But to my knowledge, he has never loaned nor given a dime. Some people don’t respond kindly to his tactic, only interested in money and money now. He brushes them off with nary a worry.

    I have not been put in the situation yet but hope I can use the same strategy when it happens.

    • 22

      Len Penzo says

      Yeah, Oscar, I actually think that your uncle has the right idea.

      In fact, I think I will adopt that policy from now on. Then, if only after all alternatives are exhausted, will I consider lending the cash.

  12. 23

    Amber says

    Oh, I’ve got a perfect story for this:

    I loaned my fiance $2,500 for a car issue. He was desperate at the time (I made him exhaust all other avenues first) and needed the car to keep his job. We were newly engaged and I knew our financial lives would soon be entangled, so I thought it would be ok. Plus, he loved me…

    Needless to say, it is now a year and a half later, I’ve not seen a dime of that money and I am no longer engaged. The funny thing is, every time I would ask him about paying me back, he’d get angry and start yelling at me, as if I did something wrong. I had to learn that lesson the hard way, but $2,500 is a small price to pay to make sure I didn’t marry the wrong person.

    • 24

      Len Penzo says

      I hope you kept the engagement ring as collateral, Amber!

      Er, you did get an engagement ring didn’t you?

      Come on, Amber … don’t leave us all hangin’! ;-)

  13. 25

    says

    Great topics. I have to say that I’m glad that you made that loan to the single mom that really needed help. The reluctance is understandable, but it can be really good to help people in such situations and happily she paid back it appears.

    Anyway, I think that you have a healthy approach to this in that you won’t make the loan unless you’re able to stomach losing the money and let bygones be bygones in the event you don’t get paid back. Now, I have to say that the latter part could only be reserved for close family for me, as anybody else who didn’t pay me back in full – well, I would feel totally burned.

    But you’re right when it comes to folks very close to you, where you really value the relationship, you would have to be willing to forgive if ultimately they just couldn’t/didn’t pay.

    • 26

      Len Penzo says

      I’m glad the loan to the Honeybee’s friend worked out too — although I really really really was torn at the time. I was this close to saying no.

      I actually felt bad when she repaid the money because I truly believed we’d never get the money back.

  14. 27

    Pat says

    Wow, great stories. I’ve always found it difficult to refuse loaning money to close friends and family, and I rarely have refused. Once, I barely had money to put food on the table for my newly wed wife and myself, but we agreed to loan some money to her brother because he had some emergency medical surgery.

    Had it not been an emergency though, we would have probably refused. But ever since, thankfully we’ve been rather comfortable, financially speaking, and so the other loans have not been a problem.

    The interesting thing is that we’ve had a 100% recovery rate, which I guess is quite rare for people who lend out regularly to family and friends. I’m quite confident about lending to them now, since I know they aren’t going to be splurging on luxuries with the money they borrow.

    It’s often very difficult to say no to people you love, but I agree with you, you have to put your foot down when you can’t objectively afford to live your life the way you were living it before they approached you after loaning them the money.

  15. 28

    Diane says

    I would never, ever, ever do it. I would give a gift, sure. But loan someone money? No way. Too fraught with the possibility to blow up the relationship.

  16. 29

    dcinDC says

    When I was working, I took the same approach – I would make a one-time “loan” of $500 to any friend who I felt really needed the money. If I didn’t get it back, that was fine; if I did, that friend could get another loan at some point if needed. I made an exception for one friend – well, first she ASKED for $5,000 – we weren’t that good of friends! I never gave her a penny for a number of reasons, namely I had done a lot for her for a few years, and I felt that her needs were predicated on her sheer stupidity. Sorry, but I’m just not going to bail even a good friend out because of their bad decisions. That may not seem fair but, believe me, this goes way beyond simple bad decisions. Hard to explain, but I think NOT giving her any money at all was the better thing to do in this case.

  17. 30

    Mario Antinori says

    I always lend money to people who are broke and can pay on time. I don’t ask for them to pay me, I just wait for them to do that. If they don’t pay on time, then I would never lend them again.

  18. 31

    Byron Allen Black says

    My dear old dad was the epitome of wisdom when it came to lending money.

    When he would borrow $20. from me he assured me it was a good loan, saying “Son, I’d rather owe you always than beat you out of it.”

  19. 32

    Chris says

    I have loaned money to friends and family on a few occassions. 1 loan was fairly large and worked out perfect! Another friend from high school and college took ~16 years to repay a $1200 loan, but he paid… Family loans on the other hand, destroyed the relationship. Will NEVER do it again!

  20. 33

    Darlene Levorsen says

    We have recently come upon this situation, and was quite pleased to stumble upon this blog. My husband HAD a few friends that he’d let know he was now receiving his disability benefits, and without fail the very DAY he got paid over the last few months, they’d either come by or call wanting to borrow money. Keep in mind, when they wanted money was the only time we seen these people. With the female, it was always, “I need food for my kids”, although she’d turn around and spend the money on drugs. With the guy, it started out as, “Dayne needs diapers” or “He needs formula”. My husband being the person he is, won;t let a child do without, so he’d lend the money. Anyway, the guy’s wife is filing divorce papers, because turns out that he was as well as the female friend, buying drugs. I kept telling my husband that these “friends” of his were only using him, but he couldn’t or chose to NOT see it, until recent when he got burned $120 by the female, and another $350 by the guy. He has recently taken my advice and cut ties with them, because I don’t think it’s right that he helps out drug addicts to feed their addictions, while our family does without because he’s got too soft of a heart when it comes to children.

    • 34

      Len Penzo says

      I’m sorry, Darlene. Thank you for sharing your story.

      It’s sad that people get themselves in such situations. In the end, I am a firm believer that the only people that can ultimately help them is … them! That’s not to say I won’t help somebody in need. But my m.o. for handling people who say they need money for food — or even kids’ diapers, if that scenario were to come up — is to buy them food (or diapers). That way they can’t take the money and turn around and use it for drugs, alcohol, or any other vice.

  21. 35

    lucy says

    great article. i have lent $ to family and 1 friend over the years and only the friend paid it back AFTER I DAMN ASKED FOR IT a dozen times. Never again.. My sister borrowed $500 from my mother and promised to pay. did 2 payments and then stopped, but for her anniversary with her husband they went to a nice resort and christmas that year at there house was phenomenal. She owed my parents 10’s of thousands of dollars over the years and now they have both passed. Her children are the same way.. No more lending to family i say.

  22. 36

    Lisa says

    Another rule to follow is never lend money to someone who is always struggling financially. There will always be an excuse as to why they can’t repay you. My husband and I only give loans to 2 of our closest friends and occasionally my sister. We’ve never had a problem getting our money back.

  23. 37

    Nate Carroll says

    I have really enjoyed reading all of the stories here and the memories that they brought to mind. I am one of the unlucky ones who has been burned more times than not, yet I still cannot say that I would never loan money again. The most recent example really got me peeved when a friend of some 13 years was in a jam with his car impounded, which he needed to work (alarm installer), rent due, and a baby coming any day asked to borrow $1200 for only a day and a half till he got money from his Dad. Now, I have been really generous with everyone over the years, but this was a lot of cash and to be honest I wasn’t sure if or when I would be repaid. Not wanting to lose the friend and at the same time wanting to know how much I could trust him, I said that I could loan him $400. Then I put $1200 into an account that I rarely used and gave him the atm card and the wrong pin number and told him I couldn’t get to the bank but he could get it out and give me the card back later. Shortly after I got a call from him because the pin didn’t work and I gave him another two wrong pins before I “finally remembered” the right number for that card. The next morning I was disappointed to see that the entire account had been emptied even though I had explained that I needed the other $800 for mortgage payments (well not really) and my calls were ignored for the next two days. Then I let him in on the gag, I explained in a voicemail (since my calls were not answered) that I was going to have to report the card stolen and that I must be honest if they ask me if I have any suspicions about who had taken it, which will lead to them showing me the atm footage and my ID of him. Then I said that they probably wouldn’t believe him when he tells them that I voluntarily gave him the card since it took him 3 tries to get the pin right which was simply the first 4 numbers on the card. I got paid back that afternoon and we are still friends even though what I had done was probably just as bad as ripping off a friend, I guess the two acts sort of canceled each other out.

  24. 39

    Tony says

    Hi everyone ,
    I lend £7600 to my friend’s brother in uk on august, 2012 . he promised me that he will give me back in a month .but he only gave me £1000 back in jan 2013 .now he refused to pay me back and ignoring contract from me . i m living in London and he is living in Manchester , so it is hard for me to go in Manchester and chase him for my money back.

    some of my friend say that i m fool , but i am always like that to lending money (AS a help )to family & Friends. this is the first time , someone screwed me up. I transfer money him by bank .Is there any legal system to get my money back asap in uk ????
    if anyone has suggestion about it , plz let me know about it . I will be grateful to you .
    Thanks

  25. 40

    Elisa says

    About a year ago my mother got married. She invited me to her wedding just only one day before her wedding.I never approved of her marriage and ended up not going I always had the vibe that her husband was a worthless lazy son of-/—- now she is not speaking to me because I did not let her borrow money for my grandfathers visa. I don’t think I should be helping her financially after all she does have a husband and has no more small children to support.

    In the past I have lend her $1000 dollars and never repaid . I’m so upset that she doesn’t realize that her husband is screwing her up financially and that she’s mad at me for not helping her with this whole money situation I’m frankly tiered of her thinking that I am her ATM Machine

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