Understand you may not get your money back
In a U.S. study, Bankrate suggests that 46% of adults who lent money to friends and family either lost money (37%) or their relationship with the borrower was damaged (21%).
That’s why people need to think carefully before lending money, says Jessica Moorhouse, money expert and financial educator.
“When you loan or borrow money from a friend or family member, it automatically adds an extra layer of complexity to that relationship since you’ve just introduced a new power dynamic,” she explains.
If you decide to lend money, there are some things to keep in mind. Will lending money put a strain on your own relationship? Can you afford to lend the money in the first place and not feel any strain? Will it help the person borrowing the money and will you be OK if you never get repaid?
The answer to these questions will determine whether you should lend money. Even if the loan won’t strain your finances or a relationship — and you’re fine with not getting repaid — it’s still important to consider how the money will be used.
“If you see someone asking for financial help, but they need help that goes beyond that such as health, addiction and mental health, money may actually not be what they need and may even make things worse or prolong the real problem,” says Moorhouse.
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What are the legal implications?
However, there are situations where lending money could be fine, such as a parental loan towards a down payment for a home. This is separate from a gift, which doesn’t have any interest, or repayment terms.
The understanding is that the loan will be paid back but Moorhouse pointed out potential tax implications.
“If you are lending money and expect interest payments, that needs to be claimed as income on your tax return. There are also tax implications if you lend money to your children to buy a home, so it’s important to talk to a tax professional or financial planner before lending any money.”
If you do decide to lend someone money, Moorhouse says it’s always good to get it in writing. However, the risk of non-payment remains.
“It’s always advisable to get it in writing through a promissory note, contract or other type of documentation. With that said, only you can be the judge if you believe you’ll be paid back or not,” she says.
“In my family, we don’t believe in loans. We only do gifts. This eases any would-be tension that the exchange of money can produce.”
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