Loans Among Family and Friends | Money Management | Exodus Lending - Exodus Lending

Loans Among Family and Friends

By Kaitlyn Szabo September 2, 2022

Asking family and friends for money can feel embarrassing or shameful. On the flip side, loaning money to a loved one can feel risky or stressful. But the options for small-dollar loans are incredibly limited, especially for those with low or no credit, and it’s tough to see someone you love in a pinch. This lack of resources may help explain why over half of Americans borrowed from or loaned money to family and friends in 2020

Should I Lend Money to Family or Friends?

Because this scenario likely has a meaningful relationship tied to it, we recommend reviewing Investopedia’s “How to Lend Money to Family and Not Regret It” or our post on supporting loved ones financially before lending money. As with any loan, there is no guarantee they will repay it, so be aware of any risks and be prepared to say no. 

Should I Borrow Money from my Family or Friends?

If you want to ask for help, have a clear proposal of how much you want to borrow and how you plan to pay it back. To preserve trust and minimize risk, only ask for a loan if you feel confident you can pay it back. Taking out a loan you cannot afford may put your loved one in a financial pinch and negatively impact your relationship. 

Do’s & Don’ts of Loans Between Family and Friends

If you decide that an interpersonal loan makes sense for your situation, we recommend reading Investopedia’s “Do’s and Don’ts of Lending to Friends and Family.” Here are some key highlights:

  • Do: Communicate and establish boundaries. Try to think through all the details and issues (e.g., When are appropriate times to discuss the loan? Will we have check-ins? What if the payment plan isn’t working?).
  • Don’t:  Assume that everyone has the same ideas and expectations. Everyone has a different relationship with money and assuming you see something the same way is the perfect setup for miscommunication.
  • Do: Talk with any other parties who are involved in the finances. Be sure to get the buy-in from all involved parties (like spouses).
  • Don’t: Make assumptions about someone’s ability to loan or repay the money. Even if you are close with this family member or friend, you never know what someone is capable of or willing to do until you ask.
  • Do: Have a written repayment plan that is equally agreed upon by both parties. Many examples are available online, or you can work with a “family loan servicer” to help guide you.
  • Don’t: Make or take a loan that you cannot afford. Review your financial situation first and think through any consequences or tax implications giving or receiving a loan may have.

Put Yourself in One Another’s Shoes

Preserving your relationship is often the first concern for people considering lending or borrowing loans from family and friends. That’s why prioritizing communication is crucial to prevent tension and unnecessary strain. Money conversations are hard because finances are a volatile, emotionally charged subject. Here are some mindsets or frameworks to help you move past stigma and shame: 

  • Don’t think of formalizing loan agreements as distrust. Instead, it’s a method to protect your relationship.
  • Respect each other’s boundaries and do your best to see everyone’s perspective. 
  • If a conversation becomes too heated or defenses are high, pause and talk later. 
  • Avoid any shaming or stereotyping and try to facilitate transparent communication with an open mind.

Money Management E-Newsletter: August 2022