How to Lend Money Responsibly to Friends & Family

There are many reasons why loved ones may ask for money. Medical care, job loss, lack of credit for loans, and personal emergencies are all common situations people may need extra assistance with. Lending money to family and friends can be a kind gesture and a way to help.

However, while many of these concerns are valid, it’s wise to fully assess your own financial and emotional situation before deciding to commit to giving. It’s important to recognize and set your boundaries to ensure your finances and relationships stay healthy. The greater the amount of money, the more consideration needs to be taken. 

Assess First

Don’t be afraid to tell your loved ones you need some time to think about the situation. Parting with any sum of money is a serious decision that requires some extra examination. Giving to others is generous, but it’s important to assess these questions before deciding: 

  • Would it take from your own emergency fund? 
  • Would it make it harder to pay your own bills or loans?
  • Do you have debt?
  • Are you currently making a steady paycheck?
  • Would you be overwhelmed if you were not paid back or were paid back late?

If any of these are true, it may be an acceptable reason to say no. 

Set Boundaries

If you decide to loan money, draw up a payment plan in writing that you can both agree to. While it may seem awkward to get loans documented with close friends or family, it is necessary in order to protect your finances and can help avoid even more challenging disputes later on. 

Things to include on your written plan are the date of the loan’s beginning, the amount of money loaned, the terms of repayment, the due date for each payment, the interest rate, any consequence of not making a payment, and any other stipulations you agree upon. 

If you still feel uncomfortable, consider paying only a small portion of the amount they need. This can be a better way to be helpful without putting yourself at considerable financial risk.

Write a Check

Writing checks can be the ideal medium for loaning money, especially large amounts, because it creates a paper trail that you and your friends or family can check if necessary. By cashing the check, your loved one will leave a proof of exchange at that bank, which provides documentation that the money has been given and received. 

Checks are often the mode of payment for large purchases, like down payments on houses. Luckily, you can have a copy of the check that got deposited and this track record makes larger purchases or donations safer. Giving cash comes with more risk because there is little to no proof that the exchange was made and for how much. 

Lending money can be a generous act, but ensure you examine your personal financial situation and lifestyle before committing. If you don’t have your assets in a good place, a compromise or simply saying no may be the best answer.