Alan Farley
3 min read
Financial literacy expert and CEO of Children's Financial Network Neale Godfrey has advice for lending money to family and friends that won't ruin lifetime relationships. She understands there's plenty of emotional pressure to help loved ones in a financial crisis, but a good heart can lead to heartburn if both parties don't understand and agree to lending terms. It's especially risky when there's no paperwork or legal contracts backing up this money transfer.
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Just 56% of loans are fully paid back according to recent research, revealing miscommunication between borrower and lender. The one making the loan has few options because there's usually no contract and forcing the issue can have lifetime repercussions. In fact, a 2022 report lists financial disagreement as a cause in 20% to 40% of divorce cases. Generational lending is equally dangerous if younger folks feel entitlement to family assets, especially if they're going to inherit the money.
Data highlights this family and friends' minefield, with the same study noting that one in four lenders reported "negative impact" from the transaction. In addition, more than a quarter said they were forced to set up formal repayment plans to finally get back their money.
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Expectations need to be set early, according to Godfrey, with the borrower making it clear the money must be repaid, unless it's given as a gift or "gift in kind." A gift in kind is an agreement that certain actions, like helping on family chores, will satisfy all or part of the debt. In addition, repayment terms should be clear to both parties before cash changes hands, along with a discussion of interest and payment frequency.
She warns potential lenders to avoid enabling bad financial habits. Is this the first time the friend or family member has asked for money, or is it a habitual problem that reflects deeper social issues? If so, it's probably a good time to have a sit down, working together to create a real-world budget for the borrower's lifestyle, assets and financial outlook. Also make sure the money won't be used to further bad habits, like drug use or gambling.
