Whether it’s writing a cheque to a family member who’s way behind on rent, or spotting a friend a big chunk of change, lending money to loved ones is something most of us have done – even though it can be painfully uncomfortable.
That’s especially the case if that same person has been mooching off you to pay their landlord for months on end, or never seems interested in paying you back after you helped them out of a pickle.
Yet many of people hit up friends and family for extra cash, especially when times are tough. A 2019 survey from the US Federal Reserve showed that when faced with a hypothetical expense of $400 that they couldn’t cover right away, the second most common approach was to borrow from a friend or family member (putting the charge on a credit card was the top option). And during the pandemic, people may be especially likely to turn to trusted confidantes for a helping hand.
Still, there’s no doubt introducing money into a relationship can make things weird. We’re generally close to the people to whom we lend money. But experts say that lending money conflicts with societal taboos about discussing money, and introduces a power imbalance into a close, trusting relationship. This can potentially leave both parties feeling complex emotions like shame, embarrassment and anger.
Navigating this kind of situation can be hard, but with clear communication and expectation-setting, you can avoid a lot of the discomfort that comes with helping a friend out.
A taboo that changes relationships
“I think money is still a very intimate subject for a lot of people to talk about authentically,” says Maggie Baker, psychologist and financial therapist based in Pennsylvania, US. People may talk about money a lot, but we don’t ask each other about our specific financial situations, she says. “There’s this shroud over this whole topic of money, and how much you have, and how much you don’t have.”
J Michael Collins, professor and director of the Center for Financial Security at the University of Wisconsin, US, says that money is already a taboo topic of conversation. That taboo makes relationships complicated and murky.
“If I go to a bank and take out a loan, they’re going figure out if I can repay it or not. Then I sign a contract, and that contract says if I fail to pay, then something will happen: they’ll garnish my wages, or take my car back. We get none of that when we loan money to a relative” or friend, says Collins. It’s the “loose nature” of the agreement, as well as the “lack of follow-up ability or accountability that makes people really nervous”.
If you loan somebody money, they’re indebted to you whether they recognise it or not – and then all of a sudden, you’ve got the power – Maggie Baker
Lending money to someone also means the entire tenor of the relationship changes. “If you loan somebody money, they’re indebted to you whether they recognise it or not – and then all of a sudden, you’ve got the power,” says Baker.
And this subtly changes your role in the relationship. “You’re not just a friend or family member – all of a sudden, you’re a loan officer,” says Brad Klontz, financial psychologist and associate professor at Creighton University in Nebraska, US.
There’s also a high degree of uncertainty for the lender, because no matter how close you are to someone, you may have no idea how they are with money. In fact, experts say most loans aren’t repaid; Baker says that nine times out of 10, the friend in the jam will not pay back the loan.
Klontz agrees. “You have to be 100% OK” with not getting the money back, he says. Often, the person asking for the loan will prioritise all their other bills and expenditures ahead of you. And even then, unless they hear otherwise, they’re going to assume you’re so financially comfortable that you don’t care if you get the money back or not.
“Typically, what happens is they start to avoid you, and then you start to feel resentful,” says Klontz. “You feel like you’re being taken advantage of – you feel like someone’s not respecting your boundaries, or you.”
“It’s a very critical moment,” he continues. “Because if you loan them money, it could destroy the relationship. And if you don’t loan them the money, it could destroy the relationship – they might be really upset with you. In a moment of need, you weren’t there.”
Lending a loved one money can breed resentment, because people don't often get paid back; it also introduces an unfamiliar, new power dynamic (Credit: Getty Images)
Why planning matters
Experts agree that if you go into the situation without a clear plan for repayment, it’s likely to backfire: “It’s a recipe for resentment,” says Klontz.
Of course, casually picking up a dinner or drinks bill is different from formally lending someone a specific sum. Friends spotting friends is totally normal, and this kind of lending often comes with a high degree of ambiguity – it can depend on the person or the occasion. But experts say lending friends money becomes a problem when it’s a pattern – and when the friend expects you to keep footing the bill. “That’s where you’ve got to be really clear: ‘I’m happy to go out, but I’m not going to pay for your dinner this time’. That’s the kind of transparency – the upfront expectations – you have to set with people,” says Collins.
For a more substantial loan, “the number one thing is, give yourself time to think about it”, says Baker, and consult with your partner, family members or anyone else sharing your financial decisions.
Collins says that even if you don’t have a written contract, set up a payment plan with specific deadlines. If you’re spotting someone half their rent cheque – $500 (£363) for example – say, “I know that you get paid on the 15th, so how about on the 17th you pay me back the $500. Or if you want to break it up into two $250 payments, you can pay me $250 on the 15th and $250 on the 30th.” “Be that precise,” says Collins.
Brad Klontz says "you have to be 100% OK” with not getting the money back
“This may sound draconian to some people, but I would make them write out a contract,” says Baker. Be as specific as possible, and even float the idea of charging them interest – though maybe not as much as the bank, says Baker, as you could hook them up with a “family or friend” discount. And if you really want to avoid the matter altogether, it might be a good idea to actually go to a bank instead.
“Give this person a chance to really think through: do they want to ask you for this loan,” asks Baker, “or are they better off going to a bank, where it’s a total impersonal thing, and it’s not going to screw up the relationship?”
No matter the dynamic, steer clear if your friend has a problematic past with money. “You want to be careful you’re not financially enabling anybody,” says Klontz. He says you don’t want to make your financial help actually hurt them, which can be the case if they “are a hot financial mess” with a “pattern of chronic financial mismanagement”.
No overarching rules
Still, experts stress that every scenario is different – because our relationships with people vary wildly, as do their own individual circumstances. And even though many loans that you’d like to see repaid often end up becoming more like gifts, there could be situations where the transaction should be considered a gift, full-stop.
For example, if someone is generally responsible and has a full-time job, but suddenly faces catastrophe – a medical emergency, a burned-down house or something similar – and they need support, Baker says “I would just give them the money”, with no expectation that they pay you back.
And in fact, our social networks often are what get us through hard times, whether it’s a friend group, families, neighbours, religious groups, colleagues and more. “These kinds of networks are how we all get by,” says Collins. But “you’ve got to do it in a way that works, and everybody is clear on expectations”.
And if you’re upfront with your expectations – whether you want to lend money at all and, if so, whether you want the money back and when you want it back – you could end up helping a friend in need without torching the relationship.
Be honest if money ever enters a close relationship, says Collins. “You’ve got to break through that taboo.”