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What is your Money Lending Rule?

This is an interesting question that applies to just about everyone.  What do you do when a friend or family member asks to borrow some money from you?  What is your rule?  Or do you have one?

Personally, I try to avoid lending money to friends and especially relatives.  However, I give the exception to the rule to immediate family.  Why do I avoid lending money?  No, i'm not greedy over my money, the fact of the matter is if you lend out money to your friends/family, you'll most likely never see it back.  After a long period of non-payments, it may be awkward to keep hounding for payment.  And what happens after that?  The lender builds resentment and the relationship will inevitably turn sour.

That leads to me a story.  A LONG time ago, my uncle borrowed a substantial amount of money from my Grandma and neglected to pay her back.  This was about 20 years ago now, and guess what?  Whenever my uncles name is mentioned around my Grandma, you can see her slowly clench her fist.  Maybe that's an exaggeration, but my Grandma still to this day mentions my uncle in a negative light.

So that is why I don't lend out money to friends or family.  Better to say no at the beginning than to destroy a relationship.

What is your money lending rule?  And no, you can't borrow $20…  :) 

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 33 comments… add one }
  • Make Money Online October 11, 2007, 5:27 am

    My rule never lend to family and friends unless its life and death. Meaning the hospital or illness. Also I only lend an amount that I know will not harm me financialy if not returned. Otherwise if its just $20 I don’t tell them but I consider it a present. If they repay the 20 great if not I forget about it the moment it leaves my pocket.

  • Payday loan October 11, 2007, 7:17 am

    Yes I have a simple answer for this, If you want that you dont want a friend or relative anymore, just lend him some money. Simply saying if you lend some money to your friend or relative, it means you losing him.

  • FourPillars October 11, 2007, 7:28 am

    I haven’t had that problem so I’m not sure how I’d handle it.

    I guess if it was a close relative (ie sibling, parents), I’d do it but they might be in for a major financial review from yours truly… :)

    Mike

  • The Financial Blogger October 11, 2007, 8:24 am

    Actually, when a close friend of member of your family ask you for money, there are three possible endings:
    – He is frustrated that you say no, he fails to get money elsewhere and the relationship turns sour.
    – He is happy that you say yes, he fails to pay you back and the relationship turns sour.
    – He is happy that you say yes, he pays you back and the relationship keeps going.

    All this to say that it is hard to keep relationship when it comes to money. However, I would still lend money to my friends or family.

    With my banker background, I would draft a repayment schedule with the borrower and ask him how he intend to pay me back. If he does not have a plan and just say “I’ll pay you back man!”, I will not lend him a penny. I will tell him to come back to me with a proper reimbursement plan.

    Basically, if my friend shows good will and already thought about how he will reimburse his debt, I will be more than happy to lend him money.

  • FrugalTrader October 11, 2007, 9:27 am

    FB, good point, perhaps a proper reimbursement plan would work. However, over time, I would say that the re-payment plan would turn into a no payment plan. :)

    Another idea, perhaps getting collateral is the only way to ensure that someone pays you back. Kinda like how a mortgage has a lien on your property, or how the old mafia guys used to do it. :)

  • Telly October 11, 2007, 9:30 am

    Thankfully, the few times I have lent money to family, I’ve been repaid. About 5 years back I lent money to my cousin who’s like a sister to me (about $3k). She paid it back in full when I asked for it about 8 months later (and no, I did not charge interest). Our relationship is still great and I know that I could count on her if I needed it (thankfully, I don’t).

    The only unfortunate thing is that the money was lent in USD. By the time she paid me back, the USD had dropped significantly so I actually lost money on the deal. :(

    Anyway, my point is, if I have the money I find it hard to say no but now that I’m married, I find fewer people ask me for money, knowing that I’ll have to talk to my husband about it. $50-100 sure, but beyond that, unless it’s our parents or siblings, I don’t think I’d do it. Like “Make Money Online” said, I really only lend money that wouldn’t damage me terribly if I never got it back.

  • Whiplash October 11, 2007, 10:13 am

    If I lend you 20$ and never see you again, it’s probably the best 20$ I could ever spend.

    Seriously though…I don’t lend money to anyone but my sister and when I do it’s is only an amount I can afford to lose. Basically I’ll give it to her knowing I won’t get paid back.

    Thankfully for me, she’s doing just fine on her own. :)

  • ThickenMyWallet October 11, 2007, 11:23 am

    It depends on context. If its for a business venture then get a business plan in place and treat it like a business deal (as FB writes- get a repayment schedule in place). If its for a short-term emergency, I tend not to have an issue lending money to a loved one. But if its for consumption not related to an emergency, I am not lending money so someone can buy an iPhone!

  • Mr Cheap October 11, 2007, 12:43 pm

    I flip flop on this issue. Often it seems like the best policy is “I never lend or borrow money from friends and family”, but in so many ways that seems limited (if we can’t trust the people closest to us, who can we trust?). A lot of families with an “old world” background lend money among themselves and they have a far easier time getting their first house, starting a new business and whatnot because of it.

    Schulich wrote in “Get Smarter” that a true friend is someone you’d loan $100,000 to. Given that he’s a billionaire pehaps the rule of thumb is that you loan 1% of your networth to people you consider close friends.

    That being said, if someone agreed to repay me and didn’t, I’d have a hard time getting over that (I’d be like Grandma MDJ ;-) )

  • guinness416 October 11, 2007, 12:53 pm

    If I “lend” money to friends or family, I assume it’s gone, a gift. If they pay me back it’s a bonus. Life’s too short to be hounding my sister for a thousand bucks or whatever. Having said that, I’ve never been in the position of being asked for very large loans.

  • Calvin October 11, 2007, 2:23 pm

    I’m Chinese and family ties and preserving these relationships are important. The family has always also been considered an important economic unit in Chinese history and still persists in Chinese culture to this day. I’m referring to the family playing the role as a social / economic security net.

    To that end, my fiancee’s aunt and uncle have graciously offered to loan us $20,000 towards our downpayment with no interest.

    I’m glad our family members don’t follow the same general rule that has been described here!

  • Cannon_fodder October 11, 2007, 2:32 pm

    I have lent a family member several thousands a few times and never got paid back. If I thought about the lost opportunity cost of the money it would greatly inflate the original amounts.

    But, I never needed that money in the true sense of the word, and I have long ago accepted that it would never be returned.

    The fact of the matter is, I might have been better off in certain cases to not have loaned the money in the first place. I say this because it obviously didn’t teach the recipient about prudent money management or about how to honour a ‘debt’ to a family member with the same integrity that you would a credit card company or such.

    Now, if faced with the same situation, I would be able to look at how fortunate I am and provide the money with an initial expectation that it would never be repaid.

  • Gates VP October 11, 2007, 3:17 pm

    I use the simple axiom: “Bank are for lending”.

    Banks have way more money than I do and if they can’t afford to lend money to my friend/family, how am I going to?

    So I just look at it as a gift. If I can’t afford to give the money as a gift or the money is not some form of “business partnership”, then I simply can’t afford the loan and I have to say no.

  • FourPillars October 11, 2007, 3:33 pm

    Gates – you just reminded me that about 12 years ago I couldn’t pay my visa bill off and I asked my mom for a loan and she turned me down saying I should go apply for my own loan at the bank (I was working fulltime). I have to admit that her actions helped me turn around my finances.

    Mike

  • the Wealthy Canadian October 11, 2007, 5:36 pm

    I like FB’s comment. I don’t mind lending money if I know what it’s for (i.e., it’s not for some consumer goods) and there are agreed upon terms.

    Calvin, I understand where you’re coming from. Family is important but without those set terms then the loan may inadvertently just become a gift. Then you suffer poor family relations, etc.

  • Brian October 11, 2007, 9:24 pm

    “The borrower is SERVANT to the lender.” I don’t care who or what the circumstances, lending money to a friend or family member has the makings of changing the relationship forever…and not for the good.

    I have refused to ‘lend’ money to friends after having learned this lesson the hard way more than once. If they are really a friend and I have the money, I will give it to them if in fact, I believe that it will not involve me in being an enabler of bad habits.

  • The Financial Blogger October 11, 2007, 10:29 pm

    you can always ask to the mobbs ;-) as long as your knees are right, your credit is right :-D

  • Dave October 12, 2007, 12:02 am

    I’ve never lent out large sums of money but I have one friend and one cousin that have been known to ask me for $20 once in awhile. Like Make Money Online said, I consider it a gift but don’t let them know that. They usually pay me back but I don’t dwell on it. But the more times I lend out to someone who doesn’t pay I tend to remember and then my response is “sorry I don’t have the cash on me”.

  • Financial Hack October 12, 2007, 9:31 am

    My rule is simple. Any money I give is given as a gift with no expectation of it coming back. If I’m not willing to give the money outright like that, then I don’t. This takes away a lot of issues that can cause trouble down the line.

  • nancy (aka money coach) October 13, 2007, 3:42 am

    When I give seminars about debt, I always list possible creditors (visa, LOC, car) and include family/friends in the mix. Then I ask how one might prioritize repayment. It’s usually by highest interest or the most significant impact for not repaying. Then I bring up … but why would you pay back Visa instead of your brother? If you lose your relationship with Visa, there’s always mastercard. If you lose your relationship with your brother … and there’s always this stunned silence in the room. I don’t necessarily recommend neglecting visa in favour of family, but it sure mixes it up! Food for thought.
    (and on a personal note, I’ve been both the recipient and giver of loans in my lifetime. In all cases there’s been a confidence of repayment at a time that ‘worked’ and that has indeed been the outcomes. I’m glad I am able to help out, and always grateful for those who freely helped me out when I needed it.)

  • v October 16, 2007, 12:41 am

    i learnt this when i was 16 to never lend out money ever again
    i lent a friend 200$ which was alot at 16…and i had to chase after him for it
    though i got it back in full
    but we never spoke after i lent him the money…. nor after i chased him for the money and he paid it back.

    unless its my immediate family.. and they need it life or death

    then good day.

  • Mrs. Micah October 16, 2007, 9:06 am

    I don’t expect repayment. And so lend accordingly and communicate this to the borrower. If someone pays me back, it’s a nice surprise. If they don’t, no sweat because I wasn’t expecting it.

    Otherwise I think it has the potential to completely ruin relationships. And I’d rather not take a chance on that.

  • Blain Reinkensmeyer October 19, 2007, 12:57 pm

    I will only lend money to certain family members like my brother who I know will pay me back. A few years back I lent my brother $3,000 and it took him a year to pay it back but now recently he lent me a $1,000 when I needed it. I like to think good deeds come back to help you which is true but you definitely need to be working with the right people.

  • Aleks October 19, 2007, 5:33 pm

    I lend money to family and friends all the time (or have it loaned to me) and it always gets repaid. It probably helps that my friends and family are all fairly good with money and the loans are merely for convenience.

  • pjwlk November 9, 2007, 3:47 pm

    Fortunately for me, everyone thinks I’m the cheapest prick that ever lived and nobody has the balls to ask me for any money…lol Seriously though, I don’t lend money to anyone as a general rule unless the circumstances are extreme. When the cicumstances warrant it, I will lend what I can afford to lose. Before lending I also ask about the person capacity to repay me and how and when they expect to do so.

    A friend of mine always asks for some form of collateral. His most recent example was a guitar that the loanee cherished very much and was probably worth 3 times the $400 loan. My friend states that if he doesn’t receive payment “in his hand” by midnight on some agreed date that the item becomes his to do with as he sees fit. He got his money… that time. A previous time though with the same two fellows the collateral was a nice 10-speed bicycle. The loanee failed to pay on time, no doubt expecting some leanency and my friend then cold-heartedly executed his rights. A few days later the loanee stood in disbelief at my friends doorstep ,money in hand, as my friend announced that he had sold the bike… C’est la vie…

  • TTCMartin July 7, 2009, 8:35 pm

    It was not a cash money lend it was a friend buying a 3 wheeler from me years ago. We had a payment plan of $50 a week. He sent me all the money (i was keeping track) then I get another $50 check in the mail. I called him and told him that was one too many checks. He chuckled and said he was not keeping track. I only would do it with him, do to the fact that we have been best of friends since 1st grade. We are in our late 40’s now. But I have many family members that I would not give a dime too as a loan. I would help them if they were willing to help themselves. Like getting a job for starters.

  • Roberta March 10, 2012, 9:56 pm

    If it someone I wish to help out, I give the money as a gift, with the stipulation “Your choice: pay it back, or pass it on.” I decide how much I can afford to give (i.e. Can I afford to lend whatever the asker wants — or only less). When I make my offer, it’s with that caveat, above. This way, if it is returned to me, I’m pleasantly surprised… and if it’s not, I can assume the best about the borrower and not lose any sleep over their personal debt load.

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