Should you loan money to family and/or friends?

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Wow, I think I just raised many eyebrows with that one. Everyone knows that loaning money, especially when you are in a tight situation is difficult at best. When the money doesn’t come back, for whatever reason, it makes it 5 times worse. And, I’ve been in the situation when you have to ask for money and the expected payoff doesn’t come in for you to pay back the loan. These situations are not fun for either side, but they also tend to make enemies of people who had been close up to that point.

Source

Should you loan money when asked? Well, you need to think about many factors when answering that question. First, do you have the money to loan? Second, can you afford it if the money doesn’t come back? Those are the two major questions you must ask yourself. If the answer to either is “no”, then the answer to loaning the money is no; it is that plain and simple.

Now, on to the next question. Did the person who asked you if they could borrow the money, borrow money before; and if so, did they pay it back? When loaning money, if the person borrowed before and didn’t pay it back, why would you assume they will this time. No matter who they are (family or friend), if they aren’t reliable then you shouldn’t give them money, unless, of course, you don’t care if you get it back.

Would you loan money to someone?

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So, despite all of the good advice above....

You have decided to loan them the money anyway because they are family and you know they are in great need and they usually pay back at least some of it and…….We’ve heard it all, right? So, you decide to loan out the money and you want to have at least some kind of promise of getting it back, right. Ask the borrower to sign a promissory note. Yes, that’s right. Ask them to sign a promissory note. You have the right to ask for this type of document no matter who the person is. Write it out, sign it, date it, have them sign and date it and make sure it has all of the information included (date of agreement, amount loaned, when and how it will be paid back, who borrowed the money, who loaned the money and both signed and written names in the signature section). I have included an example here. You can adjust it as you need it. Be sure to make two copies and get both copies signed so that each has an original signature. Also, if both parties go to a local notary (there is usually one in the Town Hall) it will be more legal (get both notarized as well).

Promissory Note
Promissory Note | Source
You know, this means war!!!
You know, this means war!!! | Source

Now, you have the money, you can probably sneak by if you don’t get it back, and the Promissory Note has been signed and Notarized and each of you have a copy. Now what? Well, you give the money to the borrower at the time of signing and then wait for the money to come back according to the agreement.

What if it doesn’t come back? Well, we have a few options before it becomes all out war. First of all, you need to look at the person’s situation. Did they have the money and blow it? Did they call out of work and go on a mini vacation with your money? Did they go out and buy something they didn’t need? Well, anyway you get the idea, did they use the money and their subsequent paychecks frivolously instead of paying you back as agreed? Or did they fall into a situation where they lost their job or ended up in the hospital or something?

Note for Amendment
Note for Amendment | Source

There are two sides to this one.

If they just didn’t pay the money back, then you have a right to take them to small claims court and sue for the money. I would ask once, maybe twice, then I would warn them that you plan to sue. If they fell onto hard times, you might want to write up an amendment to the promissory note stating that you are extending the loan for XX days to give them a chance to get the money.

For an amendment: Write on BOTH copies of the original promissory note that there is an amendment dated today’s date. Both parties should initial the note about the amendment. Now write up an amendment referring to the original promissory note and that you are extending the time, lowering the payments, etc. as per the agreement. Have two copies made. Both parties sign and get them both notarized. Attach one amendment to each original promissory note and hope for the best. I have a sample shown below.

Amendment
Amendment | Source

Unfortunately....

If you loaned the money and it doesn’t get paid back, it usually becomes a family or friendship affair whether you want it to or not. Some will say you are taking advantage; others will say they should have paid you back. Some will say you shouldn’t have loaned it in the first place; others will say that you should have known you wouldn’t get it back and it would be a gift not a loan. The comments and suggestions will be endless. In the end, though, it will be whether you feel you need to get the money back, or you have learned your lesson and won’t loan to them again.

Family/Friend "Sucker"
Family/Friend "Sucker" | Source

Sadly, family and friends often take advantage:

Sadly, family and friends often take advantage of “suckers” who will take precautions like getting a promissory note and then will “feel bad” about dragging them into court and so will let the matter go. Unfortunately, once you let the matter go for a certain amount of time, you will no longer be able to take them to court.

For example: You loaned your best friend $100 and they signed a promissory note saying they would pay it back with their next paycheck. They decide to go partying instead and blow the money they needed to pay you back. They swear they will pay it back the following week, but the same thing happens. In fact several weeks have gone by with no payment. Now your other friends are harassing you about getting a promissory note and being too afraid to follow through and your best friend is smirking on the sidelines. You give your best friend one more chance and again they fail to follow through. You get angry and take them to small claims court. But, because you failed to get an amendment to the promissory note and failed to get witnesses to the fact that you asked for the money, and because you waited so long to file, your best friend may actually win the case and walk out free and clear of debt. Who’s laughing now?

No money!
No money! | Source

So....

Do you act like Scrooge and refuse to lend the money? Or do you give in, loan the money and try to take all the written precautions to protect your investment? Either way, you could be considered the bad guy by family and friends. And, if the person fails to pay it back, there are very few options opened to you especially when it comes to the friend/family options. Family feuds have been fought for centuries over less!

I leave you with this advice. If you loan the money, make sure you can afford to be without the money just in case. Me, I would tell the borrower that, unfortunately, I loaned the money to my mother last week and she hasn’t paid it back yet, sorry dude. I know, I’m a Scrooge.

© 2012 Cheryl Simonds

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Comments 14 comments

tarajeyaram profile image

tarajeyaram 4 years ago from Wonderland

Cherylone - you have touched a difficult subject. It is very difficult to loan to family and expect it back. My theory is if you loan money to family, don't expect it back. If you are tight and doesn't have money to loan, try not to give. Usually it ends up in a war. Great hub on a difficult subject. Voted up and useful.


cherylone profile image

cherylone 4 years ago from Connecticut Author

Thank you for stopping by and voting, tarajeyaram, I appreciate the kinds words as well. Yes this is a VERY touchy subject which is why I thought it might be a good subject for a hub. Thanks again, and may you never find yourself in this type of situation. :)


Steve Rabago profile image

Steve Rabago 4 years ago from Laguna Beach, California

Hi Cheryl, good tips and advice from your article. I actually run a company called ZimpleMoney (you can find us on the web if you want). Our entire business is based on intrafamily loans, loans to friends and businesses extending credit to people you know. We are big advocates for lending money to family and friends, particularly when credit is tight for most consumers. The loans we discourage are loans due to poor financial management. Those would be the "I can my credit card bills or rent because I manage money poorly." We also don't advocate loaning money to people without a job, that really should be considered a gift (or a loan you'll never see again). We do see loans being made to buy homes, cars, travel, unexpected medical expenses, and in estate planning (getting money to family before you die). These are what we call "Lending with a Purpose" - you can get a free e-book with that title on our website if your interested. We also see many businesses extending loans to friends and neighbors with poor credit, no-credit or little credit.

Lending money to friends and family needs to be done with great care and you need to be willing to say no.

Lastly, you are correct in saying, if you don't have the money, just say no...I don't have the money to spare. There is no reason to add to your own financial burden when your friend cannot manage there money.


cherylone profile image

cherylone 4 years ago from Connecticut Author

Thank you so much for your words of support. I like the sound of your business. It sounds like you are stepping up to help out people who have been hard struck by this difficult economy. Thank you for reading and leaving a comment. :)


fpherj48 profile image

fpherj48 4 years ago from Beautiful Upstate New York

OH...I surely have done this...but most of my "loans" are to my own children (adults) and occur rarely. I learned several hard lessons, lending to "others,".(non -family).....It shall be a cold day in hell, before I do it again. ....Great hub...interesting and UP!!


cherylone profile image

cherylone 4 years ago from Connecticut Author

fpherj48, thank you for stopping by and voting. We often give because we care, but when it doesn't come back we find ourselves in a very tight spot. I agree about the cold day :)


Jan 4 years ago

Great article!

I have a friend who signed a Promossory note basically stating that he promised to pay his father in law back $$$ (a hefty credit card balance) that had 1) no date as to when the money would be paid back, 2) no interest rate mentioned in the note and 3) absolutely no mention of payments or a payment plan. Is this Promissory enforceable in California? One more thing, the lendee was unemployed at the time of signing the note and is still unemployed.


cherylone profile image

cherylone 4 years ago from Connecticut Author

In answer to your question about promissory notes: I believe federally the note is enforceable and usually if there is no date as to pay back, then it is assumed that there is a "reasonable time period of payment due". This could be anywhere from 30 days to a year depending on the local laws. Without an interest rate mentioned, there is no enforceable interest payment; however, if the note goes unpaid for several years and is then taken to court, the signer of the note may have to pay reasonable fees and court costs. The bottom line is this: your friend is still required to pay should his father-in-law decide to enforce the note. I would add this little bit--there may be a statute of limitations for promissory notes in your state. I would check state and local laws for more information. Hope this helps.


tipstoretireearly profile image

tipstoretireearly 4 years ago from New York

I'd loan money to family or close friends, but I wouldn't expect to be paid back. That way, I wouldn't suffer any disappointment if the money didn't get repaid. Interesting hub on a difficult subject!


cherylone profile image

cherylone 4 years ago from Connecticut Author

tipstoretireearly, thank you for your comment. I have given money often when I really couldn't afford to lose the money and have suffered the consequences. And yes, this is a very difficult subject.


Ebonny profile image

Ebonny 3 years ago from UK

This is an interesting enlightening hub on a touchy subject to say the least. I have lent money in the past and not been paid back. My policy is I will not lend money to those persons ever again. I like your line about refusing by virtue of having lent the money to your mother last week!

To be honest, if the person doesn't offer to pay back the money (or even part of it) when it is due I find it extremely difficult to actually ask for it. I know they have NOT forgotten, and I think it's a very poor show if they have the money but are playing some kind of game by not voluntarily paying it back until/unless you ask for it. I have had a person ask me to borrow more money when they never ever offered to pay back the first loan. NO WAY HOSE! The sad thing is if they had come to me when the first loan was due with a genuine excuse, I would have been more sympathetic and deferred payment or, if at all possible bearing in mind my own financial state at the time, waived repayment altogether.

For me the most important point you make in your hub is that you should not lend the money if you cannot afford to do without it should they not pay you back! Voted up and more.


cherylone profile image

cherylone 3 years ago from Connecticut Author

Ebony, sorry to take so long to get back to you, I am so glad you thought my hub was a good one. I think the most important point is "affording to go without the money" as well. So many times I have loaned to family who promise with all their heart that I will get it back and guess what--no dice. I even told them it was my rent money. I was told no problem and then never received a dime. Thanks for the votes.


Diane 3 years ago

What if a friend gave you 120,000 to purchase a house with and said it was a gift, no papers were signed.. Now she wants her money back.. What are my legal rights?


cherylone profile image

cherylone 3 years ago from Connecticut Author

I am not a lawyer, and can not tell you what your rights are; however, I strongly suggest you speak with a lawyer to find out what options you have and where you stand legally. The laws are always changing and you can never be sure until you ask someone who knows. Many lawyers will give you a free consultation. Good Luck.

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