The Risks of Lending Money to Family and Friends

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Think Twice About Lending to Loved Ones

Helping out a friend or family member who is facing financial pressure is certainly generous, but it isn’t always a good decision for everyone involved. There are risks associated with acting as a lender or cosigning on a loan. Before making the decision to help out someone you care about, think about the impact it could have on your financial health and credit, as well as to your relationships.

Risk #1: They Might Not Pay You Back

The casual nature of a loan between family members often means the terms of repayment are vague. Without a written agreement of payment amounts and dates, it is possible that loans may not be paid back in a timely manner or they may not be paid back at all.

Not only does that leave the lender with the responsibility of asking for payments, but it could also jeopardize their own financial standing if the money they’ve lent out is never returned.

Risk #2: It Could Damage Your Relationship

Lending money introduces a power dynamic in relationships. The person who does the borrowing becomes beholden to the lender.

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Even in the best of circumstances, when repayment goes well, this dynamic can hurt close relationships. It feels uncomfortable to owe cash to someone you care about. Plus, if things don’t go as planned and the loan isn’t repaid, it will be difficult to move on even with forgiveness.

Risk #3. It Could Enable Poor Spending Habits

While it isn’t always true that individuals who borrow from family members have poor spending habits, this is definitely a possible explanation for needing to secure an informal loan.

In this case, it’s important to consider the long term effect of lending to someone who isn’t making healthy financial choices. A loan could remove the natural consequences of their poor spending for a brief time, only further encouraging bad financial habits.

Risk #4. Cosigning Could Hurt Your Credit

Although cosigning can seem like a helpful option with less risk, that isn’t always true. In the end, the co-signer is equally responsible for loan repayment.

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If the borrower fails to make payments on the loan, you will be expected to take them over. This could impact your budget and your credit. Is this a risk you’re willing to take?

There are other ways to practice generosity towards those you care about who are facing financial struggles. Offer to take a look at their budget, cover the cost of financial coaching or opt for a small financial gift instead of a loan.

~ Here’s to Your Financial Health!