One person lending money to another

5 Things You Need to Know Before Lending Money to Friends and Family

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 and have been waiting months, even years, for repayment, without success, hoping I can wave a magic wand to get their money back.

I always 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

1. 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 the chances of you ever 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 or conventional lender to borrow money.

2. 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.

3. 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 must charge an interest rate that is at least as high as the IRS’ Applicable Federal Rate, which is set monthly. Currently, that rate is 2.08%, and changes monthly.

4. 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 of at least the amount of the loan. That could be a Rolex watch or a TV. Whatever it is, take possession of it. Hold it in lieu of repayment.

Include this statement of 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 to liquidate for repayment of the loan.

5. Formal repayment plan

Because you do not want to become a debt collector and deadbeat chaser, agree on a repayment plan up front 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.

First published: 4-28-13; Revised & Updated 7-21-19

Question: Have you ever lent money to a friend or family member? Or were you the borrower? How is that working out for you? Click here to join in the conversation!

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30 replies
  1. Honor
    Honor says:

    I have been both the borrower and the loaner. When I was the borrower, my mother loaned me money to pay off a vehicle loan as I was pregnant and would not be working for a while. My husband was still working. We did sign a promissory note and paid off the loan (at 0 interest) in just over 1 year. Later, I loaned my mother money at 0 interest twice to pay for hearing aids and was paid back both times. Currently I have a 2 year loan to my oldest son who is paying it back as agreed on a Missionary’s salary. I wanted to give the money to him and he would not hear of it. The youngest son, however, is not so responsible and has not paid back his loan from some years ago,

  2. middle sister
    middle sister says:

    I have an older sister who has come to me numerous times, always at the 11th hour, to bail her out. Her financial problems are often linked to her son’s financial issues. She & her husband have demonstrated poor money management for years and have taught their son some very bad habits. Currently she is repaying a loan of several thousand dollars and is within about 5 months of paying it off. They have nothing of value to use as collateral. We have made several attempts to help them set up a budget so they could see the “light at the end of the tunnel” but, apparently, they prefer living in the tunnel! It has caused a great deal of stress in my life … not only in my relationship with her but also with my husband. I really can’t do this anymore.

  3. js
    js says:

    My husband loaned his mother $8000 without my consent. I am furious as this lazy, irresponsible woman has not paid us back. She needed this money for a car. She filed bankruptcy and has no job and therefor couldn’t get a loan out of the bank. I have a copy of the check that went to CarMax along with the VIN# of her car. I have documented her payments along with all of her excuses as to why she couldn’t give us a payment. My husband has not held her accountable for this money which is a joint marital asset. He has recently told me that his mother paid it all back which I know is a lie. I know for a fact that she still owes $4500! I cannot afford to gift this money either. We are short on funds and it has made my husband do the unthinkable which has been forging my signature 3 times and getting $22,000 out of my 401k which is a felony! The money loaning thing and now this has thrown me over the edge! I don’t feel the same towards my mother in law or my husband. This has severely damaged the marriage. I blame my mother in law for part of this disaster. Don’t ever loan money to anyone for any reason!

  4. tika's mom
    tika's mom says:

    Loaned money numerous times to stepson. Never got a dime back even with legal contract. When we stopped loaning him money, he disowned us. Figured free money was his right regardless of how it inconvenienced us or hurt us financially. BTW, he is 46. Took too many years for my husband to wise up and realize loaning him money was a bottomless, thankless pit.

  5. EA from St. Louis
    EA from St. Louis says:

    I borrowed $5000 from my Dad to buy a good used car. We set up a promissory note and interest, and I had my payments direct deposited out of my paycheck into his account. I paid the debt off and the bonus was that when I was in better financial shape I was able to continue the payments to bolster his income after he retired. He never would have let me give him money if he had realized. I didn’t miss it because it was already budgeted. Win, win!

  6. bobbi
    bobbi says:

    My brother, who worked at a micro chip company (as well as his wife) asked to borrow 5k-he would get the money from his 401K when he paid off his loans (worth the 5k, I assume). Then we get annual Christmas letter about how they went on a cruise with their two sons and two of the sons friends! My husband was livid. He did not pay us back within a month, always with some excuse. He signed a promissory note and said he would pay interest-I guess I should have asked for collateral-he never paid interest and went way past the repayment agreed upon time frame. The next year rolls around and he has the nerve to ask again! After I had to hound him to repay me. I told him to call and ask my husband-we both knew that he wouldn’t agree! problem solved!

  7. Bobbie
    Bobbie says:

    My husband payed a co-workers cable bill without asking me because they were going to get disconnected.I was so mad at him and reminded him that cable in not a necessity. We did get paid back, but it was one month later that they need a loan again, but this time it was for a lot more money to pay their utility bill. I told him NO. It sounds like they rob Peter to pay Paul. We got lucky the first time, but with all their bills being 3 months overdue, at some point I know we would not get our money.
    We do not lend to family, why in the world would I lend to a co-worker?

  8. That guy
    That guy says:

    I would add the following:
    1) Always think about it as a “gift”
    2) Expect that the nature of your relationship will change. The borrower goes from friend/family member to debtor–possibly deadbeat debtor
    3) “collateral” can be legally tricky. There are always rules/laws about how to obtain a security interest. There are also sometimes rules or restrictions on “pawn shop” type loans even if you aren’t a pawnshop.
    4) Remember, desperate people do desperate things. Expect the worst.

  9. cerinthe
    cerinthe says:

    I remember reading a letter in Dear Abby years ago from a woman who loaned $5,000 to a family member who had not paid as agreed, and there was nothing in writing to prove the loan had been made. So she wrote the borrower a letter asking, “When are you going to repay that $10,000 I loaned you?” Immediately after receiving that letter, the borrower responded with her own letter, “What do you mean $10,000? You only loaned us $5,000!” NOW SHE HAD SOMETHING IN WRITING and was able to collect the amount owed.

  10. OWNIT
    OWNIT says:

    “Neither a borrower nor lender be.” Plan ahead and take PERSONAL responsibility for your OWN financial well-being is my view. I really RESENT that members of my family and friends trashed their credit ratings with irresponsible behavior and spending and then ask me, who has taken care over the years to preserve mine, to bail them out. I did it occasionally with the stipulation that I be paid back in full, but the resentment always ate at me. They began trying to use me and my financial power for convenience purposes. I finally put a stop to it all by telling them “No. Money and friendship/family relationships don’t mix well and I won’t jeapordize it.” I refuse to feel guilty, let myself be used, or allow the consequences of their choices to become MY problem. You have to stand up for yourself and set boundries. As Dr. Phil says, “People continue to do what works.” If they know they can get what they want from you, they will continue to try to do so. However, if you firmly end the behavior and they no longer get what they’re seeking from you, they will try elsewhere.

  11. Sharon
    Sharon says:

    We bought a travel trailer from my Dad, using a promissory note-when he passed away, we paid each of the siblings in full before the estate was settled-none of them knew we owed Dad money. The written promissory note is important to have set up in advance.

  12. Lisa W.
    Lisa W. says:

    I also gave money to friends, without a formal agreement. As long as they needed it, they agreed to payments, etc. Now that they have whatever they “needed”, there is no urgency to pay me back. Even credit card payments are being made when they have the money. I have already told them, I am not a bank and will not be making any more loans to them. I have lost one friend because of this and have noticed a “change” in the friendship of the others. Now, I will only give money to my sister. She is the only one that would help me out if I was ever in a bind.

  13. Elle
    Elle says:

    Rarely have friends/family asked me or my husband for money, thank goodness. But when they have, our policy was to never give more than we could afford to gift. That way, it didn’t damage us financially if they failed to repay. So far, so good…no hard feelings and no outstanding debts.

  14. KKG4Life
    KKG4Life says:

    years ago I lent my older sister what was to me a considerable amount of money (with no interest because she was family and in need). This was in addition to buying her and her family expensive birthday and christmas gifts. Early on her ‘regular’ repayments became irregular then sporadic then occasional and I never pressed, expecting she’d do the right thing when she could. Instead, she announced one day that she’d paid me everything owed (she hadn’t come close). That was when I finally realized the pitfalls of personal loans, especially when family or close friends are involved. I never took issue over the loan but neither have I ever felt the same about her. Nor have I offered loans to friends who were in a tough spot though i wanted to and often felt guilty that I hadn’t. These are the worst effects of poorly thought out loans.

    • js
      js says:

      I will never understand how or why a family member thinks that it’s OK to screw another person over with money. My mother in law was loaned money and she too hasn’t paid it back. I will never feel the same way towards her again! She still owes $4500 from her loan. This has also soured my marriage in the process.

      • Jan New
        Jan New says:

        We loaned our son $7,000 as well as another $800 for a rent deposit. We got maybe $4,000 back even though he believes he paid it all back. If I can gift money to him and his kids, I will. But, I won’t loan money to anyone anymore. I’ve pinched pennies all of my life and it’s not my fault that they weren’t more careful with what they had.

  15. aokimoonchild
    aokimoonchild says:

    I think the article has good ideas to help make sure you get paid back, however I would personally advise not to lend money to anyone who is in a troubled financial situation. My son spent money like there was no tomorrow and he ended up at Xmas time broke. He asked me to lend him several thousand dollars and I said No, we settled on 500$ and he provided me a written payment plan (that was to start in January) which he has not honored, we are almost May and I have not received a dime back. I’m pretty sure I won’t see that money again.

  16. Lisa
    Lisa says:

    I have been the borrower. My husband and I had a “side” business go sour, costing us thousands of dollars we didn’t have to spare. I hung my head and went to my Mom. She loaned us the money and we have automated payments to her deducted from our checking into hers each month. It makes it less painful for all of us!
    I agree that you should only borrow what you can afford to gift. Life is short and family and relationships are too precious to loose that over $.

  17. Joyce
    Joyce says:

    Years ago I loaned a dear friend over $1000. to pay for water & electricity as her business was floundering. I never got it back and never will since she is now deceased. .. Lesson learned from this: I am not a bank. I can’t lend or co-sign anything financial.

  18. katybee
    katybee says:

    I loaned $3000 to one cousin last year and so far he’s making payments on time. I loaned some money to my other cousin in the form of credit card access and after 4 yrs. she still owes me about $450 and has not even made a payment in over a year. Another cousin borrowed $2300 for tuitionand so far has struggled to make even the minimum payments
    I feel so bad when I can help and don’t, yet at the same time I hate the role of the debt collector.

  19. Guest
    Guest says:

    Lesson learned! Fact: you really do need a signed promissory note (and I would suggest having it witnessed by a notary public) and outline of a repayment plan. I lent $4,500 to one of my daughters for tuition while she was in college with a verbal agreement that she would repay when she was out of school. This was money I had put aside for my graduate school tuition. Long story short, dear daughter moved out shortly thereafter, and will have nothing to do with us and three years have passed. She is out of school. She has told other family members that it was a “gift, not a loan”. No matter how close you are to that person or how trustworthy you think that person is, do what Mary suggests. I will never loan money to a family member again; a gift, perhaps, but never a loan.

  20. Bush Brengelman
    Bush Brengelman says:

    I loan to my sisters and have them give me post dated checks for the amount of each payment. They can call and ask me to hold it a week, but this way I’m not having to call them.

  21. Marietta GA BBB
    Marietta GA BBB says:

    I once had a neighbor ask to borrow $450 to pay her power bill. She was moving out soon and couldn’t get power turned on in her new home without first paying the bill in the old. I finally agreed to the loan provided she would sign a promissory note and give me some collateral. I got the text of the note from the local library (pre Internet days). For collateral, she gave me a diamond ring that had belonged to her mother. The ring, she said, was worth $8k.

    I paid the power bill for her, and waited two weeks for payback. She did make good on her promise. I felt if I hadn’t had the ring, she would have had no incentive to pay me back. It all worked out in the end, but it created a very awkward circumstance. I have never loaned money to a friend again, but I did loan money to a family member once and never saw it again. At that time, I didn’t get a promissory note. Lesson learned!

    • discus/watchdog for God
      discus/watchdog for God says:

      I lent a large sum of money to a son. He needed it for a down payment on a house as he was soon to be married. This was totally against my better judgement. I had a promissory note drawn up by an attorney with payment schedule with a clause that I could take court action if it wasn’t paid by a certain date. He signed it. It’s been 15 yrs and it still isn’t paid. He and his wife keep stopping payments because of job changes, new baby etc, etc. I’m really upset about this and feel so stupid and betrayed. It’s been 5 yrs since there was any payment made. There will be showdown very soon as I am so finished with this.

      • tboofy
        tboofy says:

        He probably didn’t have anything to put down as collateral, but you can see how that is an important part of the equation. Not that I’m any better. I’ve “loaned” to my dad and my brother and never seen a penny back–except when I let my brother use my credit card and they made the payments on that…but it took years for them to pay off. They were never late (I made sure), but my credit score went up like 30 points once they finally paid it off.

  22. Beck
    Beck says:

    I loaned money to my sister who eventually went bankrupt. Her problems were mostly due to a doctor who prescribed numerous prescriptions that led her to having some sort of impairment. If we would have known this was going on (she lived four hours away) we would have called the Dr. or reported him and the small town pharmacist that kept filling all of them he should have caught how much she was taking as well. By the time she moved back home and got off all the meds the Dr. had retired. I was never paid back which was fine as she passed away from a stroke a few years ago. Her wish was to pay back all of us siblings supposedly in her will but her executors said she lost the will and kept the money. There was life insurance and retirement that could have been used to pay relatives back it just didn’t happen. It was not worth contesting it since they were also family. So I agree when you lend to relatives you might as well figure you are not going to be paid back.

  23. Lori M
    Lori M says:

    The amount you can gift tax-free has gone up. For 2013 it’s $14,000.

    • Guest
      Guest says:

      Thanks, for that correction, Lori. The principle, however, remains as stated. The IRS assumes you will be earning interest and will penalize you as such if you do not report it.

      • DianaB
        DianaB says:

        This is considered a gift, not a loan. IRS does assume you will be earning interest on a financial gift.

      • DianaB
        DianaB says:

        Sorry, meant the IRS does NOT assume you will be earning interest on a financial gift. This gifting is basically meant to lower your financial assets for estate purposes, nothing more. It is not considered a loan in any way. Otherwise, for tax purposes, you can try writing it off as “bad debt” if it is not repaid.

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