Risks of Loaning Money to Family and Friends

There are many risk to lending money to family and friends. After all, people typically don’t like discussing money with anyone, let alone their friends. So bringing a personal money transaction between you and your friends/family carries significant risk.

Many financial experts warn against giving loans to family and friends. Dave Ramsey discourages anyone from lending money this way. He says to offer them a loan but treat it as a gift. Make sure you don’t need to get the money back. That way, you help them out without putting your relationship at risk.

The Typical Risks

Strain on the Relationship

Money is stressful unless you have enough. Obviously, your friend doesn’t have enough. If you give them a loan, it may put stress on the relationship as a whole. It’s a risk. Are you willing to risk the relationship?

Lose the Relationship

Lending money, or even gifting money, can put a big strain on the relationship. Are you willing to risk a relationship over money?

Hurt Your Own Finances

You’ve got to think about yourself first. If you can’t help yourself, who can you help? It’s a risk when loaning out money. Some day, you may regret that decision.

End up Hurting More Than Helping

Often, people get into a debt cycle. You give them a loan once, you may as well enable them for the rest of their lives. This may just delay the inevitable point where they should begin winning with money for themselves.

Eventually Having to Say No Anyway

What may very well happen is people find out you’ve given a loan. Others may come to you next time they get in a money mind. This may happen over and over. Eventually, you’ll have to start telling people ‘no.’ That or you could open up a bank. Either way, you’ll have to begin turning people away.

Consider establishing a ‘no loan’ policy straight away. Consider an alternative option to lending money. Perhaps when a holiday rolls around, you give a struggling person more than you would if they hadn’t approached you about a loan. At Christmas, give them a free trip. For their birthday, consider buying them a big gift like a new bedroom set or a new car. They can focus their own money on other problems if they still exist.

Of course, where there is risk, there is also reward. They balance each other out. What may happen is the loan strengthens the bond between both parties. You may have helped a friend. Your friend may be extremely grateful. But this post is aimed at addressing any risk between lending money in this fashion. You assume a lot of risk when approaching this subject.

You never really know until you know. If you’re still unsure about lending money, try it. How well does it work out? If it is working out well, keep it going. Use the same methods for the following loans you give to people.

And it would probably be smart to listen to Dave Ramsey and never give out more than you can afford to lose. It’s kind of like with gambling.