What is your advice for lending money to friends and family? (2023)

Four readers ask Debt.com experts about money loans.

Borrowing money from the people you love can be difficult, so it's no surprise that Debt.com readers have asked many questions on the subject. Whether it's a friend who needs help with debt or a teenager who needs to start a business, the decision to get a relationship loan is never easy. Here are four questions - and expert answers - about lending to your loved ones.

What kind of people should I lend money to?

Questions: Speaking of the perfect storm, my boyfriend and best friend want me to lend them money! I have the money to comfortably help one, but both will eat up my savings. I'd rather just borrow one, but can't decide. My boyfriend wants less ($2,000 to pay off his high-yield credit cards), while my best friend wants more ($3,000 to buy a used car after his 1999 Corolla finally died).

Here's my problem: My boyfriend really isn't good with money, but my best friend is. My friend uses a credit card to buy drinks for all his friends at a bar while my best friend eats ramen noodles to survive. Both were laid off last year and are struggling with low-paying jobs. What should I do? My parents don't help with such questions because they say, "Never lend to your friends." What are you saying?

– Erica no Tennessee

Howard Dvorkin CPA Answer...

I hate criticizing your parents, but I have to do this.

Of course, lending money should be done with care. However, I distrust the wordNever. I prefer to make financial decisions based on facts rather than arbitrary rules. As I wrote in my second bookLuz

Friends you can trust are more of a luxury than anything you can buy or own. I can't even begin to remember all the wonderful stories my clients have told me about how their friends have helped them through difficult times. They would have collapsed under the pressure of their financial disasters were it not for the friends who helped carry the burden.

Her parents belong to a generation in which loans among friends were frowned upon. As a matter of fact,a study last monthfound: "Millennials are more likely (67 percent) than any other age group to lend money to friends, compared to 47 percent for those aged 55-64 and 44 percent for those aged 65 and older."

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(Video) 7 Things to Consider When Lending Money To Friends & Family

what should one do

While I believe borrowing from friends can be helpful, I'm also cautious. I have one rule: if I'm lending money to help a financially responsible friend get through an emergency, I'll keep my arms and wallet open. However, if a friend mismanages their money, I refuse, not out of arrogance or anger, but out of concern.

A loan in this case will only mask bad spending habits. You're not solving a problem, you're just delaying an inevitable billing.

Also, I don't believe in ruining yourself to help others. There are often other solutions. In your friend's case, he has a common problem I've seen a lot: credit card debt. Stop before you borrow moneyDebt.com beware: tell them to call one of our certified loan advisors.You will receive a free debt analysis that can lead to a debt relief plan.

As for your best friend, if you follow the advice in my answer to the next question, you'll be fine Erica. More importantly, I'm worried about your boyfriend. Are you thinking of getting married? If so, I can't encourage you enough to sit down and have a heart-to-heart conversation about money. You'd be surprised how many couples get married without knowing enough about their spouse's spending habits. You do not believe me? Check out these......Fascinating facts.

Should I pay off my best friend's credit card debt?

Questions:My mother died and I inherited $20,000. Fortunately, I have no debt other than my mortgage. I didn't go to college, but I started my own hair salon, which is doing well enough to pay off my credit cards every month and even save a bit for the bad times.

So here's the catch. My best friend since high school is an amazing woman. He studied law and now works as a prosecutor who puts bad guys in prison. In fact, he makes more than me, but he has big student loans. She also has $10,000 on her credit cards. He asked me to pay off those credit cards and he would pay me $500 a month. You would use the interest savings to pay off your student loans.

Should I do that? She's my best friend, but I'm uncomfortable.

– Paula in New Hampshire

Howard Dvorkin CPA Answer...

You feel "restless" for a reason, Paula. This is because you are in a difficult position.

If you don't lend your girlfriend the money, she will be hurt or angry or both. This can cause a rift in a long-term relationship. However, if you lend her the money and she doesn't pay you back,you will do itbeing hurt or angry or both, which could also jeopardize your friendship.

(Video) Funding Your Future: Tips for lending money to friends or family

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questions before money

Before you write the check, Paula, ask your friends some tough questions. Don't borrow money until you get honest answers...

  • How did you get into that credit card debt?There's a big difference between a one-time emergency (like an illness) and regular visits to malls.
  • Do you have any other debts I don't know about? student loansYou're repressive enough, but you need to know if your friend has a car loan, mortgage, or other debt.
  • Can you control your spending?Is your friend good with money? If not, your loan won't solve a problem. It only delays a disaster.

If you're still "uncomfortable" with any of the answers, don't borrow the money. Instead, make the following recommendations...

less dangerous options

I have always believed that personal loans should be the last resort. They should only be considered after all other options have been explored. Your friend has a pair.

she can pull onePersonal loans for debt consolidation, and you can get this loan with favorable terms through Debt.com.take out a loanProgram. Sure, you'll pay interest on this loan, but you'll save a lot more than if you kept paying the higher interest rates on your credit card.

Your best (and cheapest) option is to make a toll-free call to one of Debt.com's Certified Loan Advisers at, where you can get a free debt analysis. Until she at least makes that toll-free call and explores her options, I'd put her friend off because there might be a better way, Paula.

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How can I convince my child to lend me money?

Questions:I bet you don't get many questions like this, Mr. Dworkin. How do I persuade my stubborn son to accept my donation for his new pool cleaning service?

There are many pools here in Florida, all of which need regular cleaning. Of course there is a lot of competition between these cleaning services and my 18 year old son worked for several from a young age. Now, while she is in her freshman year of high school, she wants to see if she can start her own business.

(Video) 6 Reasons Why You Should NEVER Lend Money.

I offered him $2000 to buy the equipment which can cost a lot of money. I told him he didn't have to pay me back, no strings attached. He said no, he doesn't want help. So not only does he go to school, he works nights to save for the team.

So please tell me how to make him change his mind!

— Eleanorin Florida

Howard Dvorkin CPA Answer...

After more than two decades as a chartered accountant and financial advisor, I have learned that money is not only a financial instrument but also an emotional state.

Financially, your son is a fool if he refuses a $2,000 donation to his new business. Emotionally, he wants to do it alone. While this may frustrate you, I strongly believe that you should be proud of your decision: you raised a child who doesn't want handouts. I've found in my own career that entrepreneurs with this trait end up being the most successful in life.

However, I can suggest a middle ground.

Of course, your child does not want a donation, but how about a loan or an investment? When you charge interest, you may see your money as a business transaction rather than an unmerited gift. Find out together about the current lending rates for small businesses. You could offer him something similar. Agree on the loan rate and term so you know you're not giving them a "family discount."

Another option is to invest in your company as a silent partner. You could negotiate the terms with him. I suggest you and your child searchyouth successand find the branch closest to you. JA has taught millions of young people how to start and run a business and as a Florida resident I know there are many offices throughout the state.

In short, Eleanor, be proud of your son and realize that the rest of what we're talking about is the details.

Should I lend my child money to take a business risk?

Questions:I read the strange question you received last month from a mother whose child wouldn't take her money. He wanted to start a pool cleaning company on his own and without help. Well I have the opposite problem.

My 16 year old daughter wants me to lend her $500 to open a handmade jewelry business. Luckily I have the cash and no credit card debt. (I took your advice and asked for help a few years ago.) So I'm not worried about losing money. I worry that my daughter will be so discouraged when she fails that she won't appreciate the value for money.

What should I do?

– Amandain Idaho

(Video) Why You Should Never Loan Money To Family - Dave Ramsey Rant

Howard Dvorkin CPA Answer...

If I understand your concern, you think your daughter will lose the money and not feel the pain she deserves because it wasn't her own. I think you're kind of right.

The best way to teach our kids real life lessons about money? Let them make the money, and then let them lose the money.

So in your case I would give your daughter housework or other work so that she can quickly earn the 500€ jewelry, the pain stays with her.

In fact, I think your daughter wins whether she succeeds or not, and so do you.

Let's say you sell enough jewelry to not only recoup your initial $500 investment, but also make enough to spend on entertainment, shopping, or whatever else you like. You may find this frivolous, but it can also be educational.

When your daughter is wasting money trying to impress her friends, you can help her see the futility of it. You might also encourage them to save for college, a car, or another purchase that involves delayed gratification.

Well, what if it fails terribly?

For $500 you taught your daughter thatMany successful people fail. What made them successful was getting back up after they were knocked down. As you can see from what I've written here and elsewhere, a large part of success doesn't depend on what you have in your wallet. It is what you think.

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(Video) How to Lend Money to Family and Friends And Get Paid Back



Should you lend money to friends and family? ›

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.

What to consider before lending money to friend? ›

If you feel your friend or family is in genuine need, you could lend the money. But also consider the borrower's ability to repay. If they are working, find out how much they earn and what their other financial commitments are. Also try to find out whether the borrower is responsible about finances.

Is it OK to lend money to family? ›

Before you extend a loan to family, however, be aware that it's not as simple as just writing a check. The IRS mandates that any loan between family members be made with a signed written agreement, a fixed repayment schedule, and a minimum interest rate.

What are the pros and cons of taking loans from family and friends? ›

  • Pro: Potentially no interest to pay back. ...
  • Con: You could harm your relationship with your loved one. ...
  • Pro: Dad might choose to overlook a late payment or two. ...
  • Con: You could end up putting someone you care about in a tight spot. ...
  • Pro: No credit check. ...
  • Con: No credit reporting.

How do you lend money to family and not regret it? ›

Key Takeaways
  1. Treat loans to friends and family as a business deal, and keep all your emotions out of it.
  2. Don't expect to be paid back but if you do, expect it to be on a slow timeline.
  3. Make a checklist of questions you need to answer before you open the coffers.
  4. Consider gifting the money instead of loaning it.

What problems can be caused by lending money to a friend? ›

Why You Shouldn't Offer Loans to Friends or Family Members
  • They're Open-Ended. ...
  • Repayment Isn't Always a Priority. ...
  • It Could Damage Your Relationship. ...
  • It Can Make It Awkward for Family and Friends. ...
  • The Borrower May Feel Obligated to the Lender. ...
  • The Borrower May Ask for More. ...
  • It Enables the Borrower's Bad Financial Habits.

What should you consider before lending? ›

Important Factors Considered By Banks Before Lending Money To Salaried Professionals
  • Credit Score.
  • Current Income.
  • Employment History.
  • Occupation.
  • Repayment History.
  • Amount of Loan.
  • Purpose of the Loan.
  • Surplus Income.

How do you protect yourself from lending money to a friend? ›

Whether you are lending or borrowing money, you can protect your financial interests with a promissory note. This valuable legal tool can be used in both personal and business transactions.

Can you loan money to a family member tax free? ›

In most cases, you won't have to pay taxes for a “loan” the IRS deemed a gift. You only owe gift tax when your lifetime gifts to all individuals exceed the Lifetime Gift Tax Exclusion. For tax year 2021, that limit is $11.7 million (increasing to $12.06 million in 2022). For most people, that means they're safe.

Do I have to report a family loan to the IRS? ›

Tax implications for the borrower

The borrower doesn't typically need to report the loan and won't pay any income tax on it. In some cases, the borrower may get a tax perk from borrowing money from family. This is only the case if the borrowed money is used to purchase a home.

How much can you lend a family member? ›

How much money can I lend to a family member? Theoretically, you can lend or borrow as much money as you are comfortable exchanging. However, the lender may need to pay taxes on interest earned from loans over $10,000.

Is money taxable if I lend it to a friend? ›

If you lend the money at no interest, the IRS can consider the loan a gift, making you liable for gift taxes. The repayment schedule that the borrower must follow. State whether you'll require periodic payments, a balloon payment or some combination.

Do I have to pay taxes on a loan from a friend? ›

If you receive a personal loan from a friend or family member, there may be other tax implications, but the money still won't be taxable income for you.

Can I lend money to a friend and charge interest? ›

As mentioned earlier, loans by family and friends are tax-free for the lender and borrower; thus, the decision to charge interest is entirely your call. It is important to note that if you decide to charge your friend an interest on the loan amount, the same will be counted as your taxable income.

What is the disadvantage of a friends and family loan? ›

Borrowing money from family and friends is rife with potential problems such as hurt feelings and resentment if you don't pay back the debt as planned. One out of six of those respondents said it ruined one of their relationships, with the main reason for 41 percent being, “the loan wasn't repaid.”

Why might borrowing from friends and family not be a good idea? ›

At best, the loan could make things awkward between you, while at worst you could permanently damage your relationship with your friend or relative. You can't build up or improve your credit history, unlike when you take out a formal loan or other type of credit.

How do you tell a family member you can't give them money? ›

Here is how:
  1. LISTEN FIRST. If you say no too quickly, your friend or family member might feel ignored, hurt, discounted or insulted. ...
  2. ASK FOR TIME. ...
  4. BE FIRM. ...

How do you tell a family member you can't lend them money? ›

Be Firm and Concise

When you speak to your friend or relative, firmly explain that you're not able to provide him with a loan. For example, “I'd love to help, but I'm just not in a position to lend you the money right now.” This is short and to the point and does not give your friend or relative much room for argument.

What does the Bible say about borrowing money? ›

The absolute minimum that God's Word establishes for anyone who borrows is found in Psalm 37:21, “The wicked borrows and does not pay back, but the righteous is gracious and gives.” If we don't want to be considered by God to be wicked, we must repay any money we have borrowed.

What are the risks of lending? ›

There can be a number of different fees attached to the loan.
  • The Interest Rate. Just because you qualify for a personal loan doesn't mean you should take it. ...
  • Early-Payoff Penalties. ...
  • Big Fees Upfront. ...
  • Privacy Concerns. ...
  • The Insurance Pitch. ...
  • Precomputed Interest. ...
  • Payday Loans. ...
  • Unnecessary Complications.

What are the main principles of good lending? ›

The lending process in any banking institutions is based on some core principles such as safety, liquidity, diversity, stability and profitability.

What are the 3 main fair lending regulations? ›

The courts have recognized three methods of proof of lending discrimination under the ECOA and the FHAct: Overt evidence of disparate treatment; • Comparative evidence of disparate treatment; and • Evidence of disparate impact.

What are the 5 P's of lending? ›

Since the birth of formal banking, banks have relied on the “five p's” – people, physical cash, premises, processes and paper.

What happens if someone borrows money and doesn't pay back? ›

When you don't pay back a personal loan, you could face negative effects including: Fees and penalties, defaulting on your loan, your account going to collections, lawsuits against you and a severe drop in your credit score.

How do you protect yourself as a lender? ›

6 ways to protect yourself when lending friends money
  1. Tip one: Lend the money in cash. ...
  2. Tip two: Create a written agreement and include worst-case scenarios. ...
  3. Tip three: Ask for collateral. ...
  4. Tip four: Ask to be a shareholder or silent partner. ...
  5. Tip five: Pretend the loan is a gift. ...
  6. Tip six: Act like a bank.
Apr 9, 2021

How do you protect yourself when sending money? ›

Follow a few simple guidelines to stay one-step ahead of the scammers.
  1. Avoid sending money to someone you've never met in person.
  2. If you feel you have to send money to someone you've never met, try to avoid sending large sums all at once.
  3. Consider paying late. ...
  4. Use a reputable and secure money transfer service.

How much cash can you give a family member tax free? ›

Like we've mentioned before, the annual exclusion limit (the cap on tax-free gifts) is a whopping $16,000 per person per year for 2022 (it's $17,000 for gifts made in 2023). So, even if you do give outrageously, you wouldn't have to file a gift tax return unless you went over those limits.

How much money can I give to a family member tax free? ›

You can give up to the annual exclusion amount ($16,000 in 2022) to any number of people every year, without facing any gift taxes or filing a gift tax return. If you give more than $16,000 in 2022 to someone in one year, you do not automatically have to pay a gift tax on the overage.

Do family loans count as income? ›

It doesn't count as income for the borrower, because they will pay this money back, nor does the loan count as a gift for the lender for the same reasons. To qualify as a family loan, the transaction generally has to meet three criteria. You must have: A written or otherwise provable agreement between the parties.

How much money can I borrow from a friend? ›

To regulate personal loans from friends and relatives government has made certain rules and regulations and also implemented various restrictions. They are as follows: The first restriction is one cannot accept a loan exceeding a limit of Rs 20000 in cash or by bearer cheque.

Do I pay tax on money I lend? ›

Loans are not taxable income.

What is the minimum interest rate for a family loan 2022? ›

The Internal Revenue Service has released the Applicable Federal Rates (AFRs) for May 2022. AFRs are published monthly and represent the minimum interest rates that should be charged for family loans to avoid tax complications. The Section 7520 interest rate for May 2022 is 3.0 percent.

Can you give a family member a large sum of money? ›

If you give more than $16,000 to one person, it's okay, but you'll need to file a gift tax return (Form 709). No gift tax is due, unless you have already exhausted your lifetime gift and estate tax exemption.

Can a family member give you a large amount of money? ›

The IRS rules on gifting money are laid out in a piece of legislation called the “gift tax.” For 2023, the gift tax exclusion has been set at $17,000 per person per year for an individual filer. (For gifts made in 2022, the threshold is $16,000.)

Why is it not a good idea to borrow money from a relative or friend? ›

If the borrower doesn't repay, you can lose your money and damage an important personal relationship. Lending money to a family member or friend is a risky proposition, one that could end very badly. You could lose your money and wreck an important relationship.

What is a disadvantage of a friends and family loan? ›

business failure would mean friends and family losing money. a default on loan repayments would affect personal relationships. there are tax consequences to the lender if interest is charged. even if interest is not charged, the lender will need to consider the consequences of inheritance tax.

What is one problem with borrowing money from friends and family? ›

Reasons Why You Might Not Want to Borrow Money from a Friend or Family Member: There are no terms. Whether deliberately or just by fault, friends and family members get uncomfortable when they bring up loan terms, and those who borrow money tend to set aside the courtesy to pay back the loan.

Is it wrong to borrow money from friends? ›

Borrowing money from friends and family is usually a terrible idea. It puts a strain on your relationship and can cause guilt, resentment, and a loss of trust. No one wants to be in a situation where they need to rely on someone else to pay their bills.

What are the advantages of borrowing for an individual or family? ›

Lower Interest Rates or Interest-Free Rates

When you borrow money from a family member, they might waive any interest charges on their loan or at least be prepared to settle for a lower, more reasonable rate.

What happens if I lend money to a friend and they don t pay back? ›

If you receive interest from the loan, that is income and must be claimed on your taxes. If you do not get repaid, the money might be considered a gift to the other person, and both you and they may have to account for it in your taxes if over a certain dollar amount threshold.

What is the biggest disadvantage of borrowing money from a family member? ›

The potential drawbacks of borrowing money from family vary as much as families themselves, but could include: Disagreements or disputes over the repayment terms. * Conflicts over what exactly the business loan will be used for or what it should be used for.


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