Is it Still a Bad Idea to Loan Money to Friends and Family?

Yes, loaning money to friends and family is still a bad idea. 

That being said, there may be some exceptions. Maybe this person helped you in the past, and you want to repay the favor. Or, you’re fairly certain that the loan will be paid back.

Whatever the reason for the loan, it’s important to set boundaries to help preserve your relationship with this person and eventually get your money back. Before handing your money over, consider the following risks of lending money to friends and family. 

You May Not Get Your Money Back

It’s noble to want to help out friends and family, especially if they’re in a financial bind. The truth is that you may never see the money again. Even if you have a formal agreement in place, it could be extremely difficult to recoup your losses. 

Your Relationship Can’t Survive the Strain

Ideally, you’ll have an open and honest conversation with your loved one before lending this person money. You could express your hesitation or fear about getting the money back or hearing what your loved one has to say about their plans to repay the loan. 

If your repayment terms or expectations aren’t clear, it can put a strain on the relationship. Or, if the loan isn’t paid back on time (or at all), it could lead to further resentment. 

You Could Be On The Hook For Taxes

If you decide to charge interest, any amount you earn from lending out money may count as ordinary income in the eyes of the IRS. Not setting aside money from the interest you earn could lead to an unpleasant surprise come tax season.  

You Could Be Expected to Constantly Help Out Others

In your mind, you’re doing a one-off favor for a close friend who needed some extra cash during the holiday season. You don’t want them to struggle and can afford to lend them the money.

Unfortunately, other friends or family members may want to take advantage of your generous nature and expect you to help them. Or, the same person may ask you for additional loans. To prevent friends and loved ones from constantly believing you’ll open your wallet for them, carefully consider what boundaries you’ll set before lending any money. 

The Bottom Line

Even though you may want to help, you must think carefully before lending money to friends and family. There is the potential that you may not see the money ever again, be asked to lend money repeatedly, and end up with a lot of resentment toward people you are close to. If you decide to grant a loan, ensure you are explicit in your expectations and whether you can truly afford to part with the funds.