Awkward Conversations: The Risks of Lending Money to Friends
December 22, 2016 | Focus on Women
Many people abide by the rule of not lending money to friends or family. But when a loved one comes to you in need, it can be hard to say no. So how do you respond? And if you say yes, how can you make sure you’re on the same page about whether it’s a loan or a gift? National etiquette expert Diane Gottsman offers advice for making decisions that work for you and communicating them in a proactive, respectful way.
1. Understand the risk. When you lend money to family or friends, you risk losing financially and damaging the relationship. How would you feel if they didn’t pay you back in a timely manner? You can hope for the best, but be prepared for the worst. If you can, consider gifting the money, or even a portion of it, rather than lending to remove any potential for conflict. Remember, though, that there are limits to how much you can gift without being taxed.
“When you make the decision to lend money, you’re taking a risk,” Gottsman said. “You need to lend with no expectations. Even if they promise they’ll pay you back, in your head you have to be ready.”
2. Lend only what you can do without. Your friends and family members may think you’re doing pretty well and have money to spare, but be honest with yourself, and with them, about where you stand financially. Before you agree to lend money, think about what would happen if you didn’t get it back. Would it set back your financial goals?
“Never loan what you can’t afford to lose,” Gottsman said. “Make sure it’s not going to hurt you if you don’t get it back.”
3. Don’t be afraid to say no. If you feel like you don’t have anything to give, let the person know how you feel.
“Say, ‘I wish I had the extra money to loan you, but I’m just not in a position where I can afford to do it,’” Gottsman said. You may hurt the person’s feelings, but being up front and understanding will help smooth things over even when you give an answer he or she doesn’t want to hear.
4. Put it in writing. If you decide to lend rather than give, write up a contract, IOU or promissory note that outlines how much you lent, when and how the borrower is going to pay it back, and the consequences for delays or delinquencies. Try to keep the conversation as light as possible while still setting clear expectations. If applicable, explain that you need the money back in time to make a car payment or take a trip you’ve been saving for to help the borrower see that it’s not just money for a rainy day—you have earmarked it for a specific need, and you don’t want this loan to derail your plans.
5. Ask for it back … politely. If the deadline has come and gone and you still have not been paid back, it’s okay to ask when you can anticipate the next payment or remind them about the terms you agreed to. Gottsman recommends being proactive but respectful and civil when asking for money you’re owed. Be optimistic that they have the best of intentions. Help them to see your perspective.
“You could say, ‘We had discussed reimbursement by the end of the month, but that deadline has passed. When do you think you’ll be able to do that?’” Gottsman said. “Tell them, ‘I don’t want this to harm our friendship, but we had a mutual agreement, and I think it is important to honor it.’”
6. Let it go. At the end of the day, it is up to them to pay you back. If they aren’t going to pay you back, there isn’t much you can do without damaging the relationship even further. When friends or family owe you money, try to remember the big picture, knowing that you love them and you want to help them. And next time they ask you for help, remember what happened, and decide whether or not you’re willing to take another risk.
“When it comes to friends and family, you can call it a loan,” Gottsman said. “But you have to assume when you lend them money, you may not get it back.”