Why You Shouldn't Lend Money to Friends

Whether or not you should lend money to friends and family is always a hot topic. Recently one of my close friends, "Kara" loaned money to one of her friends, "Jen". Jen asked for the money to help with a financial crisis. Kara was nice enough to help out Jen; she gave her about $1,300. Now Jen has decided to file bankruptcy. Kara is out money and lost trust in her friend; she's also sad and disappointed because their friendship is likely over now. So here's our Flashback Friday post about lending money to friends & family.

There is nothing wrong with helping out someone financially. However, you need to consider the risks involved before making the decision to lend a financial hand.

Here are 3 questions to ask yourself before giving/loaning anyone cash:

1.) Am I putting myself and my immediate family at risk?

If the answer is yes, don't do it. Instead, focus on priorities: keeping a roof over your and your family’s heads, food on the table, transportation for school/work, utilities, and other payment obligations such as student loans or credit cards.

2.) Is this a one-time thing?

Determine this right away by talking to the person. Ask them, “If I give this to you, will it help you stabilize your situation?” If it’s going to be an on-going gift or loan, you’ll need to decide if that’s truly affordable. And not to mention if it’s a recurring donation, is it really helpful in the long run to keep giving to your friend/family member?

3.) Even if I can afford to lend money, should I?

Ask yourself first if you want the person to pay you back and what happens if s/he doesn’t. One consequence of giving money to a friend or family member may be a strained relationship - or a friendship ending, as in the case of my friend, Kara. Are you charging interest or just giving money and not expecting anything in return? Be really clear about the details of the gift or loan. Go with your gut: if you think lending money will create problems, it's best to just say no.

Alternatives to Giving Money

If your friend or family member is struggling financially, here are some suggestions to help in ways other than giving them money.

• Refer them to your local County Offices or call United Way 211 for resources in your area. You never know what someone might qualify for until it’s checked out. For instance, they might be able to access Food Support, food shelves, childcare assistance, medical, and more.
   
• Encourage them to come up with ways to make money. Can they babysit or do something for you (or someone else) that would normally be paid for anyway? That way, both of you benefit.
   
• Another idea is to suggest that they have a garage sale &/or sell their unwanted/unused goods online (make sure it’s a secure/legitimate site).
   
• Do they have unsecured credit card debt? Refer them to LSS Financial Counseling so they can set up a budget and see if a Debt Management Plan (DMP) is right for them. DMPs help people pay off credit card debt in 5 years or less, likely reduce interest rates, and sometimes even monthly payment(s).

Part of the reason we give to others is because is feels good. In the end, it’s your decision how to spend your hard-earned money. It might be difficult to say no, but in the end you have to do what’s best for YOU and your family. If you want to create a realistic spending plan so you can build up savings, improve your credit, or manage your debt, give LSS a call at 888.577.2227 for your free financial counseling session. Take charge of your finances today!

Author Elaina Johannessen is a Program Director with LSS Financial Counseling.