Lending Money:  A Loan or a Gift?

Lending Money: A Loan or a Gift?

© Oxlock - Fotolia.com - Lending MoneyLending money scenarios …

“Sarah, do you have ten bucks?”  Mindy was at the Starbucks checkout, drink in hand, and again needed money to pay the bill.  Let’s see, this was the umpteenth coffee, and last week it was the lunch bill, after she had finished eating.  This habit was getting expensive …

“Mom, I have this great idea for a little business.  I’ve put together a plan of what I need and it’s not that much.  Since I can’t find a job, would you be willing to make me a business start-up loan?”  Vanessa had been job hunting diligently since she got her marketing degree from Ohio State last year.  Meanwhile, she took any minimum wage and part-time job to bring in money.  Back home, living in her room, she contributed time and energy, especially when she couldn’t contribute money. 

“They’re going to foreclose on my house, Cindy.  Then I don’t know what I’ll do.  Steve’s gone, the kids are all upset, my job doesn’t pay enough to carry the house, but I just need some time to sell it so I can get us into something more affordable.  You know I’m good for the money, I always have been.”  Cindy’s sister Sam was sitting across the breakfast table, picking at the food in front of her with her fork, not even raising her eyes off the plate of cold eggs.

 

So what do you do when a friend or family member asks you for a loan?  Why is it such a touchy topic and why does it stress the relationship so much?

The culprit is the fact that so many of us see “talking about money” as such a taboo.

Because money carries so much emotion, saying “no” to a friend or family member is nearly impossible.  Yet, if we were able to have a calm discussion about the request, we might be able to come up with an arrangement that works for everyone.  But for it to work, the lender has to be seen as a friendly banker.  No more, no less.  Free of emotion, everyone can take a deep breath and act like adults.

Instead, there is usually a lot of mumbling, money changes hands and no clear discussion takes place of responsibility, terms, expectations … or much anything else.  The result is that we avoid the topic, the situation gets toxic, tensions rise and relationships are skewed.

The Three Key Questions

Regardless of the circumstances of the request, lending money has to start with three key questions:

  • What is the magnitude of the loan: minor or major?
  • Deep down, do you see it as a loan or as a gift?
  • Either way (since the loan may not be repaid), can you afford to lose the money?

Some other considerations:

  • Hopefully it’s not just enabling some existing bad behavior.
  • Your spouse or partner needs to be part of the decision-making process.
  • And you shouldn’t be dipping into your retirement account, no matter how strong the desire to help someone else out.

Coffee Money

If we’re talking about coffees, meals and incidentals, we need to decide how important the relationship is to us.  If it’s a good friend and “that’s just how she is,” decide if the “loans” are the price of the friendship, since they probably won’t be repaid.  You need to decide and be at peace with your decision.  If the price is too high, however you measure it, take all emotion out of your voice and simply state that you are no longer able to be her bank.  If that destroys the friendship, you’re very sorry.  But, for the friendship to be valuable to you, you have to be straight and honest.  And then let the chips fall where they may.

Fund My Business

If a family member or very close friend is looking for money for a business, for example, it’s actually easier:  business is business.  You should have access to their business plan (otherwise, forget it).  You could have them sign a promissory note (Internet Legal Research Group offers forms for each state.)  Or you could require a share in the business, with a certain amount of control over how the money is spent, but be aware of any liability you take on.  (If you’re funding a car purchase, you could agree that you’ll place a lien on it.)  Whatever you do, do not co-sign for anything that makes you responsible for more than you lent.

Emergencies 

Regardless of the amount, if it’s emergency money for something like food, housing or medical expenses, consider that it is very unlikely that the loan will be repaid.  You’d only do it if you had feelings for the borrower and you wanted to help.  If it is repaid, consider it a bonus.

The Tax Man

No one thinks of tax implications when they’re lending money, especially to friends and family.  But the IRS does expect you to charge a minimum interest rate defined monthly by the Treasury Department.  In their eyes, if it’s not an interest-bearing loan, it’s a gift and here you have some leeway: up to $14,000 per person per year as a gift.  Beyond that, there’s a 35% gift tax.

Lending Money or Making a Gift?

For any loan of consequence, once you have agreed on the amount of the loan, you should calmly discuss the interest rate, term, payment due date, late fees and consequences of non-payment. You could use a loan calculator to figure out monthly payments, including interest, at sites such as Bank Rate.

Besides formalizing the loan, having all that in writing allows you to write off the loan if the lender ever declares bankruptcy.  On the other hand, if you’re unwilling or unable to get it in writing, consider that you’ve probably just made a gift instead of a loan.

Let us know in the Comments section below if you’ve had good or bad experiences lending money to friends or family.

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Bio: Sharon O’Day fixes financial lives. She is a tell-it-like-it-is money expert with a successful career in global finance, plus an MBA from the Wharton School. Today she specializes in getting entrepreneurial women over 50 back on their game so they can have more money, less stress and more joy. With her “Over Fifty and Financially Free” strategies, they take actions that lead to their ultimate goal: financial peace of mind.

  • Vatsala Shukla

    It depends upon the situation and the dynamics of the relationships involved. A family friend used to tell me when I was younger that if you lend money, just think of it as a gift the first time and then wait for it to be returned. If the money comes back, then it is safe to lend again to that person. In Indian culture, it is normal to borrow from family including relatives for big expenditures like buying a house to supplement a bank loan. Honor works here and though it may take years, the money is always returned. In a different case, always good to know what the money is going to be used for and what can be loan implications for the lender..

    • Vatsala, I think culture plays a major role here. If that kind of lending is normal in Indian culture, obviously there is little or no emotional charge to the transaction. The family becomes the “friendly banker” I mentioned, and loss of honor (or face) becomes the heavy consequence of not repaying. What makes transactions difficult in other cultures is the unwillingness (or inability) to discuss anything about money, which leads to messy boundaries and expectations. BTW, I agree with your family friend about using a trial loan to learn someone’s behavior patterns.

  • Robin Strohmaier

    Excellent article, Sharon! Lending money to a family member can definitely be a touchy situation and your advice is great. I have not loaned a significant amount of money to a family member. If this ever comes up, I will definitely reference your advice. Thank you for sharing this!

    • Thanks, Robin, for suggesting this topic! What I’d like people to come away with is that it is the emotion around money that makes these loans such a minefield, not the actual act of loaning. If we can strip away the emotion, it can be a transaction like any other … but that involves breaking some taboos. The good news is that those taboos should be broken anyway, as part of becoming empowered around money …

  • Lot’s of good points here! Thank you for sharing this!

  • Martha Giffen

    Good point, -either way, can you afford to lose the money? That’s always the bottom line. Taking emotion out of relationships is difficult, especially with our relationship with money 🙂

    • Taking emotion out of our relationship WITH MONEY should be a goal, Martha, regardless whether we choose to lend to friends and family … or not. (That emotion is what skews so many financial decisions we make.) And, if we do that, we can even talk to family about money … without having to take the emotion out of our relationship with THEM as well.

  • Alexandra McAllister

    What a great post, Sharon! Money is a touchy subject for sure. Whenever I lend money, I do it with the intention that I may not see it again…if it is returned, that’s great! If not, then I chalk it up to experience…of course, it depends on the amount.

    • I think you’re where the majority of people are, Alexandra. But by taking the emotion out of the transaction, our chances of getting repaid is far greater and we can afford to help more people out. I’ve loaned the same money out to several people, again and again, because I always get it back … 😉

  • Susan Schiller

    I don’t remember ever asking for money, not since I took out a loan from my dad to be a foreign exchange student, back in high school… and I paid it off. Somehow my kids have picked up the same habit of not asking for money, so I’m grateful not to have gotten into mishaps in that regard… but if the situation comes up, you’ve provided some very valuable tips here. A lot of thought and experience have gone into writing this article – thank you, Sharon!

    • How great that you’ve moved that healthy lesson on from generation to generation, Sue! One thing to remember is that those tips in the article are valuable whether we are lending … or borrowing.

  • kathyrobinson

    Sharon my kids know they can always come to me if they’re in need. If I have it I’ll give it to them. They reciprocate, will buy dinner or food if they’re coming to stay for a few days. It’s a two way street for us. I rarely asked my parents for money, they never had much. Thank you for such a thought provoking article.

    • That fair way of sharing resources is terrific, Kathy, especially when no one feels put upon by it. (After all, that’s what family is for, right?) But it only remains viable as long as everyone feels that way … so a certain amount of dialog is needed to know everyone is okay.

  • Norma Doiron

    Loaning money is not something we do in our family as a rule. We have never picked up that habit and it makes everyone responsible for their financial situation. My kids began working as soon as they were into their teen years and from that moment on, never came to us for any money. I think we are blessed, they have grown to be mature adults with families of their own, totally self-sufficient. We do know that we can count on each other if we need to, but for the most part we don’t go that route. However, if we know someone has an emergency, the family will chip in together with an offering that does not need to be repaid… Great post, Sharon!

    • Norma, self-sufficiency transfers from generation to generation as effectively as bad habits do! Your children are doing what they heard AND saw, with no mixed messages. (Congratulations!) As for emergencies, we’ve all been in situations where we help … simply because it’s the right thing to do. (Notice you called it an “offering.” That’s the difference!)

  • Robert Manea

    Sometimes circumstances require us to loan money to family, i would not o it for a friend (or at least i don’t think i would) with the family loan, it has always been paid back, so when we do it, i do not stress..

    • Where healthy patterns exist, Rob, loaning money among family members can be a huge advantage. But your key phrase was “it has always been paid back, so when we do it, I do not stress …” Healthy, healthy, healthy!

  • Loaning money is a touchy subject especially when it comes to friends and family. I am all for helping someone out occasionally but I don’t want to continually enabling their behavior. Most American’s live on a strict budget and don’t have a lot of extra money to lose, so when it comes to giving I suggest being wise about it. After all you don’t need to put you or your family in jeopardy for helping someone out. Last night I was approached by a lady at the gas station, she wanted a few dollars so she could put gas in her car. I felt bad for her but I don’t carry cash on me very often so I didn’t have anything to give her. She had a nice sob story and if I had cash on me I might would have considered giving it to her. But at the same token, I have been out of work for over a year and we too are struggling to our own degree.

    • Whatever our individual “giving” philosophy, it is right. For us. The purpose of this article is to make us think through what our philosophy is. All too often we react to situations without having thought them through. And that increases the possibility of later feeling regret, one way or another. Glad you’ve thought this one through, Christy! 😉

  • Roz

    Years ago my husband & I had to get clear on our attitude about lending money. Many times we’ve gifted money to friends & family & felt good about being able to help them out. What guided me was knowing that if I lent money I would be watching how they spent any money before repayment & that would have an unpleasant impact on the relationship. This way we give with a clean & open heart.

    • That makes so much sense, Roz! If it’s a gift,and not a loan to be repaid, we are not invested in the actions between the giving … and the getting back. Your way makes it a clean, one-time transaction. Period. Phew!

  • Tina Ashburn

    This is a real issue, I know. When I give money to my daughter, I never think of it as a loan. It’s an “I love you gift”. However, if I make the offer and she refuses it, then I don’t offer it again. Over the years she has learned to take me up on the offer at the moment but not tomorrow because the moment is gone.

    • Interesting dynamic, Tina! I’m fascinated by what it means to you that she doesn’t accept your love gift immediately. You might want to think that one through … over a good cup of coffee or tea. There’s nothing wrong with that … it’s just unique!

  • Yvonne

    This is simple for me: I never ever ever loan out money if I can’t afford losing it.

    • Smart woman! On the other hand, if it was positioned as a loan, there is still some “unfinished business” energy there, whether you were prepared to “lose it” or not. (Think of the choice of words: “Losing it.”)

  • Leslie Ferris

    Interesting and touchy subject as you suggest. I have lent a few times in my life. And I then decided that I would consider it a gift, and not give another though to getting it back. And if I was in any way going to resent or regret that decision, then I would not do it in the first place. Don’t remember if I ever got it back or not. 🙂 (OK that’s a lie – I am not that good….. 🙂 )

    • Ah, an honest woman writing down her “stream of consciousness” as an answer. Love it! My suggestion is that if you do not believe you will get it back, save yourself the grief: call it a gift. That lowers the anxiety in the relationship in BOTH directions. And you get the credit for your generosity.

  • Whoah! I am always learning something new when I read your blog. I had no idea about the tax expectations on loans. YiKes. And I love the key questions when thinking of lending money. Helps to keep it from destroying the relationship!

    • Glad you always learn when you come visit, Marvia. Hopefully that means you’ll keep visiting! BTW, very few people are aware of the tax implications of loans and gifts. Granted, it has to be above a certain threshold to count … but it’s still there. And lots of parents are exceeding that limit these days.

  • I agree with Yvonne’s comment here Sharon. Any money given is a gift rather than a loan. And it’s never any big amount because I think then the rules are very different. I had no idea about the tax issues Sharon. Thank you for the great information.

    • As I mentioned to Yvonne down below, Carolyn, that’s great as long as it’s positioned as a gift and not a loan. As a loan, even if there is no expectation of repayment, there’s an open loop out there … one that’s not necessary. 😉

  • My grandmother always taught us that, when dealing with family and friends, never loan money that you can’t afford to lose because it’s not worth losing your friendship over money.

    • Your grandmother is a wise woman, Amber. But as I’ve mentioned a couple of times in comments below, if it’s positioned as a loan, even with no expectations of repayment, it will affect your friendship anyway. The solution? Honesty and clarity in an open discussion when the gift (or “pay me some day if you can” loan) is made.

  • Carmen

    Sharon, Excellent tips on handling money issues with family and friends. This has always been a sensitive subject for me. Thank you. Xx

    • Glad it was useful, Carmen. Often we just need a reason to think our personal position through and we have greater clarity when we face the situation in the future.

  • Excellent post as always and my personal opinion is you do because You want to and for no other reason period – treat it as a gift with no expectation, either that or You know for 100% that, that person is the type of person who is going to pay you back.

  • Excellent tips here Sharon! I agree that emotion should be removed from the money conversation – being self aware and respectful for self and others is key to giving or asking for monet.

    • As you say, Moira, emotion should be removed from ALL money conversations. And the self respect aspect is a given!

  • Robin

    Great tips. My dad always taught me that I should never loan money to a friend or family member unless I was okay with never getting it back 🙂

    • It’s music to my ears that your father “taught” you something about money — presumably about much more than just lending. It’s the absence of that teaching that trips so many up as adults!

  • Mike Gardner – The Time Doctor

    Great tips, I was always told to look after the pennies and the pounds take care of themselves

    • As I said to Robin, right below, it’s that teaching (or messaging) we received growing up that creates a healthy foundation around money, assuming the messages were positive ones. It looks as if yours were, Mike!

  • Sharon, wow…what an information packed article. Great tips and insights!

  • Gary Hyman

    Thanks for sharing this with us Sharon.

  • Lorii Abela

    Informative post. They say only lend an amount of money that you can afford to lose this way when you are not paid you do not get disappointed. What can you say about this, then?

  • I love the information in this post, and these are some great examples. In the past few years, I’ve kept my money close, and have “loaned” out less frequently. A few months ago, a (not so close) friend’s debit card wasn’t working, so I offered to pay for her meal, because truthfully there was no other option unless she was going to wash the dishes. My mistake was not asking her when she was going to repay me, because she hasn’t. I’ve given up on her repaying because it was such a small amount, but I’ve learned my lesson for the future.

  • as usual another great post… great thinks to think about… Thanks Sharon

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