Should I Loan Money To Friends and Family

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Should I Loan Money To Friends and Family

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Atlanta Small Business Profile – Hunter Cluthe, William & Reed Academy

July 28, 2019

Every quarter the Federal Reserve reports on national household debt, and every quarter we’re reminded of the trillions of dollars that Americans owe in credit cards, student loans, mortgages and more. But what about FF debt — aka loans from the Bank of Friends and Family? (source: finder.com)

Getting by with a little help from your friends is nothing new, but especially with peer-to-peer lending and digital wallets making lending to people we know easier, we wondered how much do we rely on our loved ones? And how much do these loans contribute to our national debt? (source: finder.com)

What Finder found is that we borrow money for much bigger expenses than to cover lunch (despite what your Venmo feed may say) — to the tune of $184 billion annually. That’s a figure that is more than student loan and credit card debt combined and deserves a closer look. (source: finder.com)

How did they calculate how much we borrowed from friends and family? 

Finder surveyed 1,417 participants last fall about whether they borrow from friends and family, which could help us get an idea of the size of FF debt*. The polling included millennials (ages 18 to 35), Gen Xers (36 to 54) and baby boomers (55 to 76). According to the results, more than 1 in 3 respondents (38%) have borrowed from friends and family in the past 12 months. After asking these people — let’s affectionately call them “takers” — how much they’ve borrowed from friends and family — or “givers” — they found that the average loan amount came to $3,239. (source: finder.com)

When nationally scaling the fact that 37% of our respondents said they borrowed from friends and family, we applied this proportion to the number of adults ages 18 to 76 projected by the US Census for 2016 (232.5 million), which resulted in 88 million Americans who borrow from friends and family. They then multiplied this by the average borrowed amount ($3,239). The calculation revealed that we’re borrowing a staggering $288 billion from friends and family — and that reflects borrowing in one year only. (source: finder.com)

So, is it a good idea to loan money to a friend or a family member?

 The first rule I would share with you is to adopt a Nancy Reagan 80’s slogan of “Just Say No!”  It is best, in my opinion, to tell people you don’t have it, you can’t afford it, or you simply don’t want to jeopardize your relationship with them.  Those answers will solve 90% of the problem you’ll have with loaning people money.

 The real question of loaning money to F&F’s is whether it’s really a loan or it is a gift.  If it is a gift, then you don’t quite have the same level of pressure because essentially you are saying that you’ll give somebody money with no strings attached.  That means you could be helping a friend through a tough time or a family member who is having trouble paying for their kids’ college.  

 The challenge surfaces when you give an UNOFFICIAL loan, which means you think you are loaning money to someone, and it may not be clear about the terms of what the loan is going to be.  Now imagine this scenario: You loan money to a friend or a family member (much like an Everybody Loves Raymond episode), and then they book themselves a four-day trip to Las Vegas.  Then, every time you see them at any event, you’ll always be wondering in the back of your head, “When am I going to get my money back?”

 I have seen many of these situations in the past, and most of them lead to broken or strained relationships or even worse situations where the two parties can’t even talk to each other at all.  The part that most people don’t consider when they make an unofficial loan is if the loan goes south and the party cannot pay back, how will you prove to the IRS that you actually made the loan?  Now not only have you lost the money, but you can’t even write it off!!

 If you must loan the money, then I would recommend making it official by creating a promissory note.  You can find samples of these on websites like Rocket Lawyer.  This note should spell out the amount of the loan, the interest rate, the terms of repayment, and what happens if they do not repay.  This will actually protect both of you, and you should make sure to report the interest on your taxes.  

There is no easy answer when it comes to the idea of loaning money to friends or family.  The big decision you should be making is whether this is a gift or a loan.  That will make the process that much easier.  Remember, relationships are tricky, and money can make them absolutely go in the wrong direction if there is a misunderstanding about it.  If you are going to loan some dough, just be clear about how it is going to work, or you might end up feeling like Tony Soprano and doing something you don’t want to do!

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