If, When, and How: 5 Ways to Lend Money to Friends and Family Without Ruining Your Relationship

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Lending money to friends or family is a tricky subject. Blogger Laura says that money and friends don’t mix. Indeed, if you’re not careful, you can end up losing not only your financial resources, but your friendships as well. Green Panda Treehouse is adamant that lending money to friends can make you lose friends and family. Even though loans to those close to you, like all loans, are never 100% risk-free, there are a few steps anyone can take to make sure that signing a check is not writing your way into a broken relationship.

1. Assess the situation – including your friend’s financial character: Some people are wonderful friends but bad money managers. If your friend ran up $20,000 in credit card debt gambling or shopping, then lending them money is probably not a good idea. If a family member fell behind on his car payment because he was laid off, but has since gotten a steady job, then a bridge loan of 3-4 months until he gets back on his feet might be appropriate.
2. Have clear expectations: Is this a gift? A loan? What are the terms? Are you charging 0% interest (make sure to clear understand the legal / tax implications of either a gift or a no-interest loan) or are you charging 5%? How long does the borrower have to pay back the money? Are there late fees / penalties? These questions can be hard to ask, but you need to ask these questions for the sake of your money and your relationship.
3. Put everything in writing. Especially if it’s a big loan. There are several online resources (such as Buxfer.com, VirginMoneyUS.com, etc.) that can help the lender and the borrower set up clear, concise payment schedules, interest terms, reminder emails, and penalties. Digerati Life suggests looking at peer to peer lending network as a first resort, before you personally lend money to a friend. Putting a loan in writing formalizes the agreement, and interjects a bit of helpful business-like structure into what can become an overly personal involvement.
4. Don’t lend more than you can afford to lose: If you have been saving money for a down payment on a house, a car, your child’s college education, a lifelong vacation that you have dreamed of since you were 10, do not lend it to a friend or family member. Even under the best of circumstances, with the most responsible and well-intentioned of friends or family members, loans can become late or go into default. So do not lend money to friends or family that you cannot afford to lose.
5. Refrain from voicing judgment on borrower’s spending habits: Once you make the decision to loan X amount of money and have set up a mutually-agreed-upon schedule of payment, refrain from the desire to voice your judgment on your friend or family’s purchases. Nobody likes to feel as if the money came with an overseer. But again, if you think your friend will be buying $2,000 Prada bags while borrowing $1,000 from you for a medical expense, then you might want to reconsider if you should be lending to that person in the first place.