Finances & Money

The Three Rules To Borrowing Money To Friends and Family

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

The phone rang on the morning of Christmas Eve. It was an in-law that lived several states away, and was in a tough spot financially. He was asking to borrow some money, and promised that he could pay us back within a week or so. My wife and I were in a position where we could help him out, so we agreed to transfer the funds to his bank account.

I’ve watched enough daytime courtroom shows to know that lending money to family members can be tricky. Disagreements arise regarding whether it was a loan or a gift, and even the amount of money involved. I can’t see how taking a family member to court would ever leave the relationship in a good place. To avoid such a situation there are a few rules that should be kept in mind before you borrow any substantial amount of money to a friend or family member:

1. Have Proof Of Money Changing Hands: Whether it be a duplicate check, a bank statement, or in my case a receipt of the transaction of me depositing the money into our in-law’s account, make sure you have record that you actually gave them the money. There’s no way to dispute the amount of money involved if you have documentation of the transfer.
2. Acknowledgment Of Loan: Send the person to whom you are borrowing money a text message or an email stating the amount of money, and that it is a loan. Ask for a response, and then ensure you preserve that interaction.
3. Do Not Expect To Get The Money Back: This seems a bit counter intuitive to the previous two rules, which give you the proper ammunition to win in court should you need to go that route. However, if your friend or family member ends up not paying back the money as promised, you may decide that the relationship is worth more than taking them to court. Plus, winning a judgment in court is still no guarantee that they will be able to repay the money. If you need and expect the money to be paid back, then you should decline giving them the money in the first place.

A friend or family member asking to borrow money is an act of desperation. We would all like to help out a loved one in need, but you have to ensure that you don’t jeopardize your own financial well being, or a cherished relationship in the process.

Have you ever loaned money to a friend or family member? How did it turn out?