What’s Your Advice for Lending Money to Friends and Family?

Lending money to people you love can get complicated, so it’s no surprise that Debt.com readers have asked several questions about this topic. Whether a friend needs help with debt or a teen needs to kick-start her business, the choice to introduce borrowing to a relationship is never easy. Here are four questions – and expert answers – about lending to loved ones.

What type of person should I lend money to?

Question: Talk about a perfect storm: My boyfriend and my best friend both want me to loan them money! I have the money to help one comfortably, but both will wipe out my savings. I prefer to lend to only one, but I cannot decide which. My boyfriend wants less ($2,000 to pay down his high-interest credit cards) while my best friend wants more ($3,000 to buy a used car after her 1999 Corolla finally died).

Here’s my problem: My boyfriend really isn’t good with money while my best friend is. My boyfriend will buy all his buddies drinks in a bar on his credit card, while my best friend will eat ramen noodles to make ends meet. Both were laid off last year and are struggling with lower-paying jobs. What do I do? My parents are no help with questions like this, because they say, “Never lend to friends.” What do you say?

— Erica in Tennessee

Howard Dvorkin CPA answers…

I hate to criticize your parents, but I must here.

Certainly, lending money must be done carefully. However, I’m suspicious of the word never. I prefer to make financial decisions based on facts rather than arbitrary rules. As I wrote in my second book Power Up…

Friends you can trust are more of a luxury than anything you could possibly buy or own. I can’t even begin to remember all the wonderful stories my clients have told me about how their friends helped them pull through tough times. They would have collapsed under the pressure of their financial calamities if it weren’t for the friends who helped them bear the weight.

Your parents are from a generation where lending among friends was frowned upon. In fact, a study last month revealed, “Millennials are more likely (67 percent) than any other age group to lend money to friends compared to  47 percent aged 55-64 and 44 percent aged 65 plus.”

What you should do

While I believe lending among friends can be helpful, I’m also wary. I have a rule: If I’m lending money to help a financially responsible friend overcome an emergency, I’m there with open arms and an open wallet. However, if a friend constantly mismanages his money, I refuse — not out of arrogance or anger, but out of concern.

A loan, in that case, will only mask poor spending habits. You don’t solve a problem, you just delay an inevitable reckoning.

Also, I don’t believe in bankrupting yourself to help others. There are often other solutions. In the case of your boyfriend, he has a common problem I’ve seen often: credit card debt. Before lending him money, let Debt.com lend him an ear — tell him to call one of our certified credit counselors at . He’ll receive free debt analysis, which can lead to a plan to get out of that debt himself.

As for your best friend, if you follow the advice in my response to the question below, you should be OK, Erica. More importantly, I’m concerned about your boyfriend. Are you considering marriage? If so, I can’t urge you enough to sit down and have a frank conversation about money. You’d be surprised how many couples get married without knowing enough about their spouse’s spending habits. Don’t believe me? Check out these surprising facts.

Should I pay off my best friend’s credit card debt?

Question: My mother passed, and I inherited $20,000. Thankfully, I have no debts other than a mortgage on my townhouse. I didn’t go to college but opened my own hair salon, which has done well enough for me that I pay off my credit cards every month and even save a little for a rainy day.

So here’s the problem. My best friend since high school is an amazing woman. She went to law school and now works as a prosecutor, putting away bad guys. She actually makes more than I do, but she has steep student loans. She also has $10,000 on her credit cards. She asked me to pay off those credit cards, and she’d pay me back $500 a month. She’d use the savings from the interest rate to pay down her student loans.

Should I do this? She’s my best friend, but I’m feeling uneasy.

— Paula in New Hampshire

Howard Dvorkin CPA answers…

You feel “uneasy” for a reason, Paula. That’s because you’re in a tough spot.

If you don’t lend your friend the money, she’ll be hurt or angry or both. That could cause a rift in a longtime relationship. However, if you do lend her the money and she fails to pay it back, you’ll be hurt or angry or both – which could also jeopardize your friendship.

Questions before cash

Before you write that check, Paula, ask your friends some tough questions. Don’t lend any money until you get honest answers…

• How did you get into this credit card debt? There’s a big difference between a one-time emergency (such as an illness) and regular visits to the mall.
• Do you have any other debts I don’t know about? Student loans are oppressive enough, but you need to know if your friend has an auto loan, a mortgage, and any other debts.
• Can you control your spending? Is your friend good with money? If not, then your loan isn’t solving a problem. It’s just delaying a disaster.

If any of the answers still make you “uneasy,” don’t lend the money. Instead, make the following recommendations…

Less-dangerous options

I’ve always believed personal loans should be a last resort. They shouldn’t even be considered until all other options have been explored. Your friend has a couple.

She can take out a personal debt consolidation loan, and she can secure such a loan with excellent rates through Debt.com’s Get A Loan program. She will, of course, pay interest on that loan, but she’ll save much more than she would if she continued to pay the steeper credit card interest.

Her best (and cheapest) option is a free call to one of Debt.com’s certified credit counselors at , where she’ll receive a free debt analysis. Until she at least makes this free call and hears about her options, I’d stall your friend – because there may be a better way, Paula.

How can I persuade my kid to let me lend him money?

Question: I bet you don’t get many questions like this one, Mr. Dvorkin. How do I persuade my stubborn son to accept my donation toward his new pool-cleaning service?

Here in Florida, there are many pools, and they all need frequent cleaning. Of course, there’s much competition among these cleaning services, and my 18-year-old has worked for several since he was quite young. Now, while he’s a high school junior, he wants to see if he can launch his own business.

I offered him $2,000 so he could afford the equipment, which can cost a pretty penny. I told him he wouldn’t need to pay me back — no strings attached. He said no, he doesn’t want any help. So he’s not only going to school, he’s working nights so he can save up for the equipment.

So please, tell me how I can change his mind!

— Eleanor in Florida

Howard Dvorkin CPA answers…

After more than two decades as a CPA and financial counselor, I’ve learned that money is not just a financial instrument, it’s often an emotional condition.

Financially, your son is foolish to refuse a donation of $2,000 toward his new business. Emotionally, he wants to make it on his own. While that may frustrate you, I firmly believe you should be proud of his decision: You’ve raised a son who doesn’t want a handout. I’ve found, in my own career, that business people with this trait end up being the most successful in life.

I can, however, propose a middle ground.

Your son obviously doesn’t want a donation, but how about a loan or an investment? If you charge him interest, he may see your money more as a business transaction than an unearned gift. Do some research together about the current rates for small business loans. You could offer him something similar. Agree on a rate and loan term so he knows you aren’t giving him a “family discount.”

Another option is to invest in his business as a silent partner. You could negotiate with him on terms. I’d suggest you and your son look up Junior Achievement and find the branch nearest you. JA has taught millions of young people about how to start and run a business, and as a fellow Floridian, I know there are many branches in the state.

Bottom line, Eleanor: Be proud of your son, and realize the rest of what we’re talking about are the details.

Should I lend my kid money to take a business risk?

Question: I read the weird question you got last month from a mom whose son didn’t want to take her money. He wanted to start a pool-cleaning business by himself without any help. Well, I have the opposite problem.

My 16-year-old daughter wants me to loan her $500 to start a handmade jewelry business. Thankfully, I have the money and no credit card debt. (I took your advice and called for help a couple years ago.) So I’m not worried about losing the money. I AM worried my daughter will get so discouraged if she fails, she won’t appreciate the value of money. 

What should I do?

— Amanda in Idaho

Howard Dvorkin CPA answers…

If I understand your concern, you think your daughter will lose your money and not feel the proper pain – because it wasn’t hers. I think you’re half right.

The best way to impart the real-world lessons about money on our children? Make them earn the money, then let them lose the money.

So in your case, I’d give your daughter chores or other work so she can quickly earn the $500. Yes, that will delay the start of her business by perhaps a few months, but if she then fails in her jewelry business, the sting will stay with her.

Actually, I believe your daughter wins whether she succeeds or fails – and so do you.

Let’s suppose she sells enough jewelry to not only recover the initial $500 investment, but she also earns enough to spend on entertainment, shopping, or whatever she wishes. You might find that frivolous, but it can also be educational.

If your daughter wastes her money trying to impress her friends, you can help her realize the futility of that. You can also encourage her to save for college or a car, or some other purchase that involves delayed gratification.

Now, what if she fails horribly?

For $500, you’ve taught your daughter that many successful people fail. What made them a success was getting back up after getting knocked down. As you can tell from what I’ve written here and elsewhere, much about success isn’t about what’s in your wallet. It’s what is in your head.