What Should You Do When Friends Or Family
Ask For Money?
Walmart founder Sam Walton borrowed money from his father-in-law to buy his first store and billionaire entrepreneur Sir Richard Branson started his Virgin empire with a loan from his aunt.
But loaning money to family and friends doesn't always work out: a recent CNN Money survey showed that 43 percent of people who made a personal loan weren’t paid back in full and more than 27 percent had not received any of the money back.
There’s actually a term now for borrowing from friends and family -- social loans or peer-to-peer loans. Deciding to make a personal loan depends on the situation, but if you’re cautious and can follow some basic guidelines, it can work.
Don't Lend Money If:
- You have outstanding debt of your own that needs to be repaid.
- The loan will deplete your own emergency savings or jeopardize your own financial stability.
- You can't afford not to be paid back at all or for a long time.
Consider Making the Loan If:
- You have the financial means to help someone and can risk not being paid back.
- Issues regarding money put relationships to the test. Proceed with caution and only if you believe making the loan will not harm your friendship or damage family ties.
Be Clear About the Terms:
- There may be tax implications if you are making a gift over a certain amount, so you may want to consult with a tax professional.
- To prove that a loan is really a loan and not a gift, the IRS recommends a minimum interest rate on loans between individuals, called the Applicable Federal Rate, which changes monthly. You’ll need to do some research or consult with a tax professional.
Do it Right:
- Consider putting everything in writing. It helps for both parties to be clear as to what the expectations are, and it generally increases the odds that you’ll be repaid down the road.
- Documents come in handy to prove the loan is truly a loan and not a gift, to resolve disagreements and to deduct a loss.
Possible Alternatives:
- If a friend or family member asks to borrow your credit card to make a purchase, think twice. Typically, it will go beyond one purchase since psychologically credit isn’t real money (just a card you swipe) and you may not be aware until the bill comes in. A better approach is to offer to make the purchase for the person after discussing and setting up a repayment plan.
- If you are not in a position to help financially, be a friend and offer other means of assistance. For example, offer to pass along the person's resume to your contacts, help organize a garage sale, or help out with babysitting so they can work overtime or take a second job to earn extra income.
- Taking on more debt to pay down existing debt is only going to put your friend deeper in debt. Non-profit credit counseling is free and trained counselors can work one-on-one with the person to create a confidential, personalized plan to set achievable financial goals and pay off debt.
