4 Reasons Why Lending Money to Friends or Family is Risky

Thanksgiving is almost here. It’s a time of gratitude and reflection, and an opportunity to reconnect with family. You’re excited to see everyone…except for your cousin Jamie. He stopped responding to your texts months ago and still owes you the $500 you graciously lent him while he was between jobs. Anxiety sets in. What are you going to say to him? Will you just let it slide for the sake of avoiding an awkward conversation? Was lending money a mistake?

When someone close owes you money, we often find ourselves regretting the decision to help them out. According to a recent money etiquette survey, 57% of people said they have seen a friendship or relationship ruined because one person didn’t pay back the other. When someone asks to borrow money, whether it’s $500 or $5,000, take a moment to consider the consequences before your altruistic instincts kick in. Here are just a few of the pitfalls that often come with lending money to friends or family.

There’s no expectation setting.

Often loans are open-ended when lending to friends or family, meaning there is zero expectation setting around repayment. There might be a handshake agreement that it will be repaid as soon as possible, but that can lead to wildly mismatched expectations between the lender and the recipient. Without a repayment deadline, there’s no sense of urgency for repaying the loan and as time passes, and tension may begin to weigh on your relationship.

It’s hard to ask for your money back.

Lending money to someone near and dear usually means asking for money back is be really tough. If they’re already in a stressful and desperate financial situation, you might even feel guilty. You don’t want them to feel awkward or ashamed about borrowing money, so you avoid it. And soon, you realize you start avoiding a lot more than that awkward question. You withdraw, communication breaks down, and things become even more awkward. Luckily, there are some handy payment apps that can make this easier. 

You start judging their choices.

When a friend owes you money, it can create a cloud of judgment over their behavior. Any time they post a photo of a dinner out, a fun trip, or a new outfit, your first thought will likely be, “Um. Why are they spending money on THAT when they owe me a ton!” Their conspicuous spending choices could leave you feeling resentful.

You start questioning their motives

You may also start to question how they interact with you and you may experience a weird power dynamic. If she picks up the bill, you may think, “Wait. Is this her trying to pay me back? Or is this just her being nice?” Anytime she offers to do a favor, you may question her intention as a way to avoid paying you back.

When You Can’t Say No

If you want to avoid these awkward issues, the best thing you can do is say no when a friend or family member asks for a loan. But it’s not always as easy as that. For those times when you decide lending the money is OK, here are some tips to ensure you don’t sacrifice your relationship as a result.

Communicate openly

Be clear that you want to support them by offering the loan AND you also want to ensure you don’t jeopardize the relationship. Ask them to commit to open communication. Ask them how they will work with you to avoid any awkwardness so that you can keep an open dialog about repayment.

Agree to a repayment plan

Establish a repayment schedule or deadline. Invite them to use easy tools to send and track payments. Talk about what happens if they miss the deadline. Be clear about whether you’re charging interest.

Just give.

What happens if your friend or family member doesn’t pay you back? Would it be the end of the relationship? If so, think very hard before you make a loan. And if not, consider your ability to simply give with no expectation of a repayment.