Lending money to family and friends can be a gesture of goodwill when someone you know is in a tight spot financially, but it can be problematic if your efforts to help lead to disagreements or you experience financial issues as a result.
In a 2019 LendingTree survey, 24% of people who lent money to someone they knew said they regretted doing so.1 If you’re approached by a friend or family member for a loan, keep these do’s and don’ts in mind.
KEY TAKEAWAYS
- Lending money to friends and family can lead to financial problems for you and potentially cause relationship damage.
- Creating boundaries for loans to friends and family can help preserve relationships and minimize the potential for problems.
- Cosigning a loan for friends and family in lieu of lending them money directly can also be problematic.
- Before lending money to friends and family, consider how it could affect you financially and emotionally.
- Lending money can incur tax implications for both the borrower and the lender.
Friend and Family Loans: When Do They Make Sense?
There are certain situations in which a friend or family member might approach you to borrow money. For example, you might be asked for a loan if they:
- Need money quickly to cover an emergency expense
- Lack sufficient credit history to qualify for a personal loan or line of credit
- Don’t meet the income requirements for a traditional loan due to illness or job loss
According to a 2019 AARP survey, 53% of American households lack an emergency fund, which could increase the likelihood of someone needing to borrow money from friends or family.2 While you may feel pressured or obligated to offer a loan, it’s important to consider whether it makes sense for you and your financial situation.
For instance, if lending money to someone would put a strain on your own finances and make it difficult to keep up with your bill payments, it’s probably not the best move. On the other hand, if you have a sizable emergency fund, little or no debt, and you’re getting a steady paycheck, making a loan might not be as difficult to manage.
