Should You Loan Money to Family And/or Friends?

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 five 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.

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.

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).

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? You need to answer these questions before you act.

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.

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.

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?

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, but I can't change it.