5 Steps for Lending Money to Friends and Family

Updated 19Jul2017

Has a close friend or family ever approached you to borrow money? Having trouble saying “no”? Do you feel stuck in an awkward situation?

Many people suggest that you should never lend money to friends or family members. This is a perfect example why:
when it’s time for repayment, things can get very awkward and friendships can even be ruined. That’s why a lot of people say it’s best to avoid it altogether.

Otherwise, if you have the money to help, just give it, don’t loan it.

When it comes to helping out a friend, especially in desperate times, it can be hard to say no. We want to do whatever we can. And so, (if you must) follow these 5 crucial steps for lending people money to protect yourself and your relationships

RULE#1: Encourage them to borrow from formal institutions.

Advise them that small loans are also being offered by institutions like banks, cooperatives and micro finance NGOs.

Rule #2: Lend only what you can afford to lose.

Give yourself a limit to how much money you can lend them. Clarify with them that the money is a loan not a cash gift. “UTANG ito, hindi BIGAY.” If you do have money to spare, make sure you only give what you can afford. Don’t put yourself in financial danger! Even a small amount can help a friend who is struggling financially. If you know you can’t give them the full amount they need, you can offer help in other ways, like helping them earn cash on the side, or help them set up a budget.

Rule #3: Assess the financial capacity of the borrower.

Always remember that the responsibility to collect the money lies on you (the lender), not the borrower. With that, try to see and check if the borrower has the financial capacity to pay you back. Ask yourself, Do they have  a source of income?”

RULE#4: Put everything in writing.

If you do decide to lend, get it in writing. Make sure you have all the basics written down and filed away. You’ll need the person’s name, date you lent them the money, how much you lent them and a payment plan you’ve both agreed upon. This will help you avoid conflict in the future. By keeping a record of the transaction you’ll be less likely to forget how much you lent them. You even ask the borrower to sign a promissory note spelling out the terms of the loan. This will serve a couple of purposes. For one, it clarifies that you are making a loan, not a gift. Additionally, if the borrower doesn’t repay the loan, you always have the option of taking them to court to collect.

RULE#5: Don’t let money get in the way of your relationship.

This is the most difficult rule to follow. If you lend money to a friend or family member, be aware that you may not get your money back and that your relationship may never go back to normal. This may cause tension, guilt, remorse and anger between you and the borrower. Thus, the risk of damaging your relationship should be part of the initial discussion when borrowing or lending money. For example, “Paula, I want to help, but I’ve heard nightmares about friends lending each other money. What can we do to make sure that this doesn’t happen to us?”

Have you ever lent money to someone close to you? Tell us about it? What are your rules? Do you regret your decision? And, finally, what advice do you have for people in either situation?

photo credit: Three Women via photopin (license)

3 thoughts on “5 Steps for Lending Money to Friends and Family

  1. Yes, sometimes I regret my decision as you know that the person who’s borrowing money would not likely pay you back. My advice is to just lend money that you are willing to lose.

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