Relationship Danger Zone: Loans to Friends and Family

“Can I borrow some money?”

“Will you float me until payday?”

Sometimes we see it coming, and sometimes, we don’t. Among the most common types of “unplanned sharing” is the loan to a friend, family member, a subordinate, or an employee. Often, the borrower asks for a loan because he or she does not want to ask for an outright gift. Some borrowers have full intentions of repaying. Others do not. Still others think they will repay somehow, but never do. 

Ironically, as a friend, employer, or relative, we are not always best suited to know the other person as a borrower; it is precisely these kinds of relationships that can cloud our judgment. Unless you have been in the lending business, it can be very difficult to predict any borrower’s ability and willingness to repay a loan.

Loans change relationships. They will lurk alongside your friendship, your family connection, or your employer-employee relationship, even when they are paid as agreed. For some borrowers, the obligation is a burden that will drive them to repay the loan as quickly as possible. For others, the obligation weighs on their conscience, but, lacking the ability to repay, they accumulate guilt and shame about it. This changes their behavior in the relationship, possibly causing anger, passive-aggressiveness, or avoidance of contact with you. For still others, the loan might as well have been a gift and is no burden on their conscience at all. The behavior change then occurs in the lender rather than the borrower. Regardless, a loan can sow the seeds of resentment, guilt, and embarrassment in both parties.

If you both decide to go ahead with a loan, formalize the arrangement in writing so that expectations are clear on both sides.  If the loan is for purchasing real estate, you can look into National Family Mortgage (www.nationalfamilymortgage.com) for guidance. Another option is www.nolo.com, which is a site with no-cost or low-cost legal documents.  It is best to hire an attorney to draft a promissory note and lien documents to cover and formalize the details. 

“Unfinished business and unspoken contracts,” as family counselor Ken Donaldson calls it, “are the foundation for dysfunction, disruption and disintegration of any and all relationships.”

Consider turning loan requests into gift decisions instead. A gift is a one-sided transaction. It comes with no expectations. Assuming you are the giver, ask yourself if you would have given the requester the money anyway? It’s okay if the answer is “no.” No matter which response you make, once the request is made, the relationship is permanently altered. Regardless of whether you say yes or no, the emotional effects of making a gift decision are not revisited with every interaction as they might be with a loan. 

If the gift decision is made, the giver should let the recipient know what to expect in the future. Establish whether the gift is a one-time offering or the first of other possible gifts. Reducing the mystery can benefit both the giver and the recipient and reduce the chances of an keep the expectations-resentment cycle from growing. 

Giving a gift for something you are passionate about can bring long-lasting satisfaction. Make it your policy not to give loans. Let gifts suffice.

This post is an excerpt from Holly Thomas’ new book, The MIndful Money Mentality: How to Find Balance in Your Financial Future, available at www.porchviewpublishing.com (Bulk discounts available), Amazon ($17.95), and on Kindle ($9.97).

Holly Donaldson

Holly P. Donaldson, CFP® writes and consults on the psychology of money. Her fee-only, product-free financial planning practice focuses on increasing financial self-efficacy for those seeking a financial navigator to help them make good decisions. She is the author of The Mindful Money Mentality: How to Find Balance in Your Financial Future (Porchview Publishing, 2013) and publisher of the award-winning monthly e-letter, "The View From the Porch." With a fully virtual practice in Seminole, Florida, she primarily serves clients located in the Tampa, St. Petersburg, and Clearwater areas. Holly will also work with clients who are a good fit located elsewhere in the United States.

Leave a Reply