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Lending someone money is a highly personal decision that requires careful consideration. Whether it's a family member, friend or even an acquaintance asking to borrow money, it's common to be a bit wary since it can have serious financial and personal ramifications for both you and the borrower.
But even if you feel pretty optimistic about the request, taking a logical approach can still be helpful. As you think through your decision, make sure to take into account factors like your own financial health, your values, your relationship with the person and the likelihood of getting paid back. Knowing how best to deal with this type of request can be tricky, so read on for helpful tips about whether lending money is the right decision for you.
When to Say "Yes"
Borrowing money from friends or family members can be an awkward experience, but there are specific scenarios when saying 'yes' could be a good idea. You might decide to loan the money if:
- You can afford to lose the money. If you're financially well-off and can easily absorb the cost—even if they don't pay you back—then it might be an easy decision.
- You have a good relationship with the person and you trust them to repay you.
- The amount of money is small and you don't need it back urgently.
- You're comfortable with the person asking for money and you don't feel pressured into lending it.
- They've lent you money in the past and it makes sense to return the favor.
- Their financial situation is dire and they're at risk of losing something that is a genuine "need," like their home or car.
- Loaning the money aligns with your core values and you would regret not doing so.
Even if, at face value, loaning the money makes financial sense, it's completely normal to still be apprehensive. Sometimes there are intangible aspects of the situation, and your feelings might differ from what seems to make sense on paper. Ultimately, it's a personal decision, and you'll need to find a way to balance the financial benefit of loaning the money with the emotional security of knowing your decision was best for you.
If you do decide to make a loan, there are a few things you should consider doing to protect your interests. One of the most common ways is writing up a loan agreement that outlines the amount of money being loaned, how you want to be paid back and timelines for repayment, among other things.
When to Say "No"
There are also times when it makes perfect sense to deny someone's request to borrow money. Those might include situations where:
- Your own financial situation is precarious and the risk of not being paid back would cause financial hardship.
- The potential lack of repayment would significantly compromise your relationship with the person.
- You feel as though their reasoning for asking for a loan is dubious, unethical or illegal.
- They've borrowed money from you before and it hasn't gone well.
- The person asking has a history of not repaying loans.
- The terms of the loan don't work for you.
- You feel uncomfortable with the situation or person.
If you have to say no when someone asks for money, try to be honest but also compassionate and respectful. Express empathy and understanding for their situation and assert your financial boundaries. Remember that refusing their request is not a personal attack on the person asking for help but rather a responsible decision for your own financial well-being.
Additionally, you might offer alternative solutions or resources that may be helpful. For example:
- You might be more comfortable giving them a smaller amount than they initially requested.
- You might also request to change the loan terms, perhaps by holding something of theirs as collateral to ensure you recoup the money in the event of non-repayment.
- If they're in dire straits (like an unexpected job loss or in danger of losing housing), you could also direct them to local agencies that specialize in helping people with rent emergencies and other financial hardships.
- If you truly trust the person or the transaction is low-risk (like a parent helping an adult child), you might decide to cosign for a loan, although that comes with its own risks.
- Pointing them toward other loan options could be a good approach, too.
Tips for Lending Money to a Friend or Family Member
While it can be uncomfortable to deal with requests to borrow money, there are some actions you can take that might make it easier.
- Only lend what you can afford to lose.
- Set clear expectations and terms for repayment.
- Put the agreement in writing and have both parties sign it. The contract should, at a baseline, include how much money was loaned, the timeline for repayment, how the loan should be repaid, clarification around any interest or collateral and penalties for late payment or non-payment.
- Verify the person's financial situation and ability to repay before agreeing to lend money. For example, if they are employed, ask for recent pay stubs. You might also ask for a personal reference or even require them to have a guarantor.
- Communicate openly and regularly about the status of the loan and any changes in circumstances.
- Be prepared for the possibility that the loan may not be repaid on time or at all, and have a plan for how to handle this situation—including the possibility of pursuing legal action.
The Bottom Line
Lending money to family and friends can be a sensitive issue that requires careful consideration. Setting clear expectations, having open communication and being realistic about the risks involved can help make the lending process smoother.
Remember that lending money is ultimately a personal decision that should align with your own financial goals and boundaries. Balancing the health of personal relationships with financial responsibility can be challenging, so don't be afraid to refer them to helpful resources like Experian's CreditMatch™ tool that can help them find financing options that work for them. With these tips in mind, you can support your loved ones without putting yourself in a precarious financial situation and navigate the lending process with confidence and compassion.