Loans between family members or friends can result in an entirely unexpected set of problems. Consider why you should not lend money to friends and family and some tips to help you with damage control if you do agree to loan money.

1. Open-ended loans

Loans to family and friends are open-ended. The parties don’t reach an agreement on a repayment timeline and don’t include interest on the loan. Lenders don’t know when their money will be returned, and borrowers don’t know when to repay the loans.

This leaves both parties in limbo and doesn’t set any expectations. The uncertainty can lead to stress as the borrower may worry that the lender expects payment, and the lender worries about when he or she will be repaid. When I loaned money to a family member, it delayed my decision to buy a house.

Pro Tip: If you must lend money to a family member or friend, give them a timeline and a schedule for repaying the loan. The timeline provides a final deadline for total repayment of the loan, and the schedule provides them with guidelines for making monthly payments. For example, “Jaan, I’m happy to lend this money to you, but I’ll need the money repaid by 31st December. If you can pay me €200 monthly, the loan will be paid off by the end of December.”

2. Loans are not a priority

With an open-ended loan, the borrower may need to realise that there is a sense of urgency to repay the loan. Without a deadline, repaying the loan becomes the borrower’s last priority. The borrower won’t face any repercussions for not repaying the loan, like late payments, higher interest fees, or a negative impact on a credit score. Without the threat of penalties, the borrower has no motivation to take the loan seriously or to put any urgency around repaying it.

Pro Tip: Talk with your friend or family member and let him or her know that repaying this loan needs to become a priority. Set a deadline for repayment to ensure understanding.

3. It’s hard to ask for the money back

It can be challenging to request repayment of a loan from a friend or family member. More than likely, the lender cares about the borrower and doesn’t want the borrower to feel awkward. The lender may continue to worry about loan repayment and thus shut down some or all communications with the borrower to avoid talking about the loan. The borrower becomes confused, and hurt feelings can result.

Pro Tip: If you have already lent money to a friend or family member and struggle with asking for the money, take the time to talk to the borrower to resolve the situation. When I had difficulty talking to my family members about paying back a loan, I offered gentle reminders about the loan instead of asking direct questions. This made the discussions easier and less threatening.

4. It can make family meetups awkward

I have loaned money to a family member, and I have also borrowed money from a family member. In both scenarios, family get-togethers were very awkward. I felt uncomfortable being around the person who loaned me money. It was also uncomfortable to be around other family members who knew about the loans.

No one wants to talk about the loan or about money or even about anything that costs money because then people might wonder why someone hasn’t repaid the loan.

Pro Tip: You and the other party came to a private agreement about the loan. Neither party should feel uncomfortable, but if family gatherings seem awkward, keep things lighthearted and steer conversations away from money.

5. The borrower asks for more 

Once you have lent money to a friend or family member, this person may return when he or she needs more money. In addition, other friends and family members may also ask you for a loan.

Pro Tip: Don’t become the go-to lender in your circle of family and friends. You should never be in a state of constant lending.

6. Lending money only facilitates more dependence

When you lend money to friends or family members, you give them an easy way out of their financial problems instead of helping them work through their issues.

For example, your cousin may ask for some money to pay off her credit card bill, but she needs help learning how to make a budget. In that situation, refuse the loan but offer to help your cousin create a budget or look for alternative forms of income.

Pro Tip: Put your friends or family members in a position that improves their financial situation and understanding of money management to help them.

7. Borrower may need the money

You want your money returned, but you may also need your money. What if you lose your job and you have no income? What if you spend your entire emergency fund searching for a new job? What if you need to put food on the table for your kids, and repayment of the loan marks the difference between keeping your house or going into foreclosure? You and your family should receive repayment of the loan on time to avoid disaster for you and your family.

Pro Tip: If you have any hint that you may lose your job or that any sort of personal financial downswing is on the horizon, don’t lend money to family members or friends. Tell them honestly that you have a tenuous financial situation and can’t spare the money.

8. You could lose both money and a family member

As Shakespeare wrote, “For loan oft loses both itself and friend.” If you lend money to a friend or family member, beware that you may not get your money back, and your relationship may never return to normal. This will cause tension between you and the borrower and may cause guilt, remorse, and anger.

Pro Tip: The risk of damaging your relationship should be part of the initial discussion you have about borrowing or lending money. For example, “Liisi, I want to help, but I’ve heard horror stories about family members lending each other money. What can we do to ensure this doesn’t happen to us?”

Final words

Even though you want to be a good person, and you want your friend or family member to love you, don’t lend him or her money if you can help it. Gently refuse the loan and determine the best way to help your loved ones instead of enabling them.

Sometimes, loving someone involves doing something they do not want, and they may be disappointed or mad. But if you have their best interests in mind, you can rest easier knowing you won’t jeopardise your relationship. 

If you can afford to loan money to a family member or friend, have an open and honest conversation to discuss any potential problems with the loan. Most of the time, issues related to these types of personal loans can be quickly resolved with a frank discussion.