One person lending money to another

Should You Lend Money to Family, Friends? Read This First

Over the years I’ve heard from dozens of readers who have lent money to friends and family members, only to have become outraged when the deal goes sour. The problem is they write to me after they’ve made the loan. By now, they’ve been waiting months, even years, for repayment, without success, hoping I can wave a magic wand to get their money back.

I tell these readers that I wish they’d written to me before they lent the money. Doing things right from the start makes all the difference in the end. Here’s how:

One person lending money to another

Accept reality

Lend only the amount of money you can afford to give as a gift. Don’t tell your potential borrower this, but know in your heart that if you just hand over the money, the chances of being repaid in full are fairly slim. That’s a fact of life. There’s a reason this borrower is coming to you and not to a bank, conventional lender, or credit card to borrow money.

Promissory Note

This is a legally binding document that when signed by both parties creates a contract. A Promissory Note lays out the details of repayment including total amount to be repaid, due dates, and penalties if the terms and conditions are violated. Search for “free promissory note” online to find a form you can simply print out and fill in the blanks. Word and PDF templates here; eForms.com promissory note templates are a good option.

Reasonable interest

It is right for you and the borrower, that you charge a fair rate of interest. If your borrower balks at being charged interest, blame it on the IRS, which says you the lender will be assumed to have earned interest rate that is at least as high as the IRS Applicable Federal Rate, which is set monthly. Currently, that rate is 0.91%, and changes monthly.

Require collateral

You can require that your borrower “secure” this loan by pledging something of value that he or she owns, which has a perceived value by the borrower of at least the amount of the loan. That could be a Nintendo Switch, watch, or a TV. Whatever it is, take possession of it. Hold it in lieu of repayment.

Include the fact of this collateral in your documentation with a clear statement that once the loan is repaid, the collateral returns to the borrower. And should the borrower default, the collateral becomes yours at your discretion, to liquidate for repayment of the loan.

Formal repayment plan

Because you do not want to become a debt collector and deadbeat chaser, agree on a repayment plan upfront before you hand over the money to your borrower. Do this while everyone is friendly and anxious to make this work. Let the borrower come up with a plan to which you can agree.

A great idea is for the borrower to arrange automatic deductions from his or her bank account to yours. Now you won’t have to wonder if the check is in the mail or if you’ll need to make yet another awkward phone call.

There’s an app for that

Of course, there is! These days isn’t there an app for just about everything?

Zirtue is a free mobile app (App Store or Google Play) and perfect for this kind of transaction. Zirtue is a relationship-based lending mobile platform that allows you to securely lend and borrow money with friends and family. It is perfect for trusted relationships—people who want to help—not take advantage—of one another.

Zirtue lets the two of you set up a formal repayment situation. The borrower pays you 5% interest on the loan and makes the automatic monthly payments you agree from his or her bank account, directly into yours. You, the lender, do not pay any fees at all, however, the borrower must pay a small monthly fee. And isn’t that right? The borrower needs to learn about how the real world operates! Borrowing money is not free. A formal lending situation between the two of you will be good for both of you.

Check out Zirtue before you make your decision on whether to lend money to this friend or relative. Knowing ahead how it works will help you make a good decision for whether or not to move forward with the making that loan.

First published: 4-28-13; Updated with current information and the new Zirtue App: 4-9-20

Question: Have you ever lent money to a friend or family member? Or were you the borrower? How is that working out for you? Share in the comments below.


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  1. Don says:

    Suze Orman says to never loan money unless it’s to fix a temporary problem. If you loan money to someone who’s always broke, you’re just delaying the inevitable crash. I wish I’d heard that years earlier before I loaned a relative money. She worked hard, but she was married to a bum who wouldn’t work. They were always short money. I only received a few payments (about 25% of what she owed me). Several years later, she was destitute again, and I gifted her $2000. She was very grateful. I made up my mind that that would be the last time. She never asked me for more, but she was broke until the day she died. After her death, I learned that she’d gotten heavily into payday loans.

    I’ve been allowing my adult children to use my credit card. 0% balance transfer offers. Two have always repaid me in full, including the fees the credit card company charges. One is rarely able to make a payment. When I die, it’ll all come out of his small inheritance.

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  2. Anne says:

    I learned years ago it is easier to just gift the money and not look for something that isn’t coming. The person you loan the money to has no intention of paying it back and every time you see them they say, “I haven’t forgotten I owe you money.” That is a clear sign they are trying to clear their conscience about the debt.

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  3. MaryLou says:

    We loaned money twice to family members without any contract. One paid $25 twice on a $2000 loan. The other was to receive a large divorce settlement so we loaned $28,000. She started doing drugs which totally derailed the large settlement. We have received $400 and probably will not receive much more. This has caused deep hard feelings. They both have had the nerve to come back and ask for more. We declined.

    Another time I loaned $1,000 to an 18yr old son of a friend. I agreed to this knowing it might not work and willing to forgive the loan if needed. We set up a free student checking account for him at my bank which enabled him to easily send me money, set a low weekly payment amount and he repaid $800 as agreed. I forgave the final $200 as a gift because I was so proud of him.

    I personally borrowed $5,000 that was offered from a friend many years ago. There was a definite re-payment plan with low interest. I never missed a payment.

    Loans to friends and family can work and be helpful but I would advise anyone considering loaning money to seriously take Mary’s advice.

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