Should You Lend Money to Friends and Family?

Most people will have financial woes during the course of their lives, including our close friends and family. This can lead to loved ones requesting financial aid from us - but should we provide it? Find out why lending money to those you care about could end badly for you both.

Lending to Loved Ones

Financial issues will affect almost everyone at some point in their lives, whether they come in the form of unforeseen costs and expenses, blown budgets, debt, or poor financial choices. And while this can be tough for anyone to endure, it may be just as hard witnessing financial problems afflict those we care about. Oftentimes these situations will see friends and family members approach you to request a loan. National Debtline reported a massive 28% of those seeking financial help owed money to friends or family at the start of 2017, and these figures continue to grow. So, while loaning the money to them may seem like the kind, and even right, decision, research shows that loaning money to friends or family members often leads to a loss of the loaned money, as well as a loss of the relationship. Here’s why...

You Weren’t Their First Choice for A Loan

A major cause of financial woes is poor planning and bad decision making. Overspending, abusing credit facilities or living off of an overdraft are just some of the financial decisions people make that can cause inescapable financial consequences. In these situations, those in financial crisis may approach banks or lenders for more money or credit to recover what they have already lost or spent, and more often than not they are declined. In these situations, they will look to friends and family members for the financial aid they need - meaning they will come to you because a bank or lender would not provide them with the funds they need, and thus that they are considered too high a risk to provide with more money. This is a major factor to consider when faced with loaning them money, as the chances of them paying it back are unlikely given their financial record.

Enabling A Bad Financial Habit

Unfortunately, friends and family often approach us for money because they have made poor financial decisions or have not managed their finances correctly. It is possible to learn and implement good financial management skills, so loaning money to your loved ones could actually result in enabling their bad behaviour. This is common in parents lending their adult children money or between adult siblings. Though it may seem unkind to decline their request for a loan, and it may cause some animosity between you, it is likely the better choice as a lesson taught through tough love may be just what they need to handle their finances more efficiently in future!

Well, This is Awkward…

Unless you put an agreement in place, chances are that loans between you and family or friends will become quite awkward. This is because, unlike a conventional loan from a bank or lender, there is nothing to regulate repayments of the loan, there aren’t any terms or conditions, and neither party has set a repayment period. This leaves everything open-ended and can make enquiring about repayments or money owed awkward. It is especially difficult for you as the lender who may have expected the money to have already been repaid, though you do not want to make your loved one feel bad by asking about the loan. Asking about the money also has the potential to turn ugly, especially if the borrower has not resolved their financial matters. This can result in the borrower avoiding you, or becoming hostile whenever you ask about the money. Feelings and shared history often make these situations even more difficult, as borrowers may expect you to be indefinitely patient or understanding about their financial situation because of your relationship to them.

Getting More than You Bargained For

In some cases, instead of resolving their money issues and paying off debt, those we loan money to spend it on other things… and they could come back to you for more! This is especially prevalent in cases where this poor behaviour has been endorsed before, and the borrower does not consider the financial implications of their request. In other instances, the borrower could repay what they owe you but return to you in future if they face financial troubles again. Worse still, lending money to friends or family often does not stay a private agreement and could result in other family members or friends approaching you for money as well.

How to Help Without Involving Money

Loaning money, regardless of the amount, to a friend or family member will most likely end badly for you both, and could even mean the end of your relationship. This is why it is better to decline the request for a loan, though it may seem hard and cruel. Instead, you can try the following to help your loved one during a financial crisis:

• - help them draw up a budget to note their income, expenses and identify where they can save money
• - discuss with them what they think caused the financial trouble, and provide ideas on how to avoid this in future
• - research and locate debt rescue or management companies that could help them repay what they owe in affordable increments