JW’s Financial Coaching Podcast Lesson #126-How to handle loans from family and friends

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  • The most difficult loan to handle is the one from family and friends
  • Why we borrow from family and friends
  • The dangers in doing them
  • Why it is important to have to clear communication when lending to or borrowing from family and friends
  • Quote of the lesson

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When I hear stories of people getting out of debt, the debt that gives them the most trouble is often a loan from a family member or friend. Giving or receiving loans from relatives or friends sounds like a good idea, but if you aren’t careful they can easily turn into a nightmare and easily lead to a ruin relationship.

Now most of you know I don’t recommend borrowing for anything, but what if you are already in the position of owing money to friends and family or are considering loaning money to a relative to help them get through a rough spot?

Today’s lesson we cover why it can be enticing to take out loans from family members and friends, discuss the dangers in doing them, how to handle these loans in the debt snowball, what happens if you can’t pay back a family member or friend, and a special discussion about co-signing and student loans.

Giving and receiving loans from a family member or friend occur often because it is easier to do then go to a bank or lending institution and go through all the paperwork and hassle. Perhaps you have bad credit and aren’t able to qualify for a loan from anywhere else. Or with low saving interest rates, you can make more by loaning it out to someone and get a better return than keeping it in a savings account in addition to “helping” out someone you care about.

However they often don’t work because since they are family or friends you don’t do the proper documentation and have a hand shake agreement. But after a few months go by, the “pay me back whenever” lender gets tired of not having his money back and seeing the borrower post on Instagram and Facebook about the nice dinner or vacation they just had. The leads to bitterness and resentment and at best leads to a strain in the relationship and at worse a total disolvement of the relationship and leading people to not talk for years.

In addition giving out a loan might not actually be a help to the individual, it might actually harm someone. Quite often these loans are given in a crisis situation due to a job loss or medical event and are used to not miss a payment on a car or mortgage.

But is this loan you are giving to them actually going to help their situation? Or is it just going to perpetuate the problem of poor financial management? That is something that needs to be considered before lending out money.

Since they cause a lot of strain on relationship I recommend treating them a little differently in the debt snowball. If I can move them up and pay them off sooner I would try. For example if you owe your in-laws $5,000 and have a $3,000 credit card balance I would try and pay off the $5,000 first, as long as you can make your own minimum payments. However if that loan from the in-laws is $20,000 I wouldn’t move it up the debt snowball.

What happens if you can’t pay? Well then you need to have clear communication with the lender and give them your entire financial picture and share why you can’t pay them at that particular time. Now this might be embarrassing to admit to them that you can’t pay. But it will help the relationship a lot more to sit down and be vulnerable instead of telling them “I’m working on it” and have no plan on how to actually do it.

With that being said I can’t recommend lending money to or borrowing from family or friends. The risk of running the relationship is too great.

Today’s quote of the lesson is brought to you by A Tale of Two Houses 

Before borrowing money from a friend, decide which you need most.” ~ American Proverb

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