The Millionaire Conundrum: Should You Lend Money to Family and Friends?

The problem with lending, as opposed to giving money is that a loan inherently implies repayment.  So if someone asks you for a loan you expect to get the money back at some point (whereas simply giving them the money would result in no debt).  As a millionaire, however, you’re in a difficult position when it comes to making personal loans at the request of family and friends that may not be as well off as you.  Because you have the money, you may not have any qualms about lending it out (and they might not hesitate to ask if you are the generous sort).  But the other side of the equation is that borrowers may not feel particularly inclined to pay you back simply because they imagine you can afford to be without it.  Unfortunately, this type of situation can ruin your personal relationships.  So while you certainly can lend money to your family and friends, it behooves you to demand that they repay loans just like they would with any other type of lender.

There are several reasons for a hardline attitude when it comes to personal loans.  For one thing, just because you have better-than-adequate funds at your disposal doesn’t mean you can afford to flush them down the drain on bad investments (which personal loans could definitely become).  After all, you didn’t get where you are by making bad financial decisions.  And if you continue to lend without first getting repayment on earlier loans, you’re basically letting people walk all over you.  That’s not a good feeling for you, and believe it or not your family and friends will grow to resent you for it.  So if you’re going to make personal loans to your loved ones, you must do so with the expectation of repayment.

This is not to say that you have to sue your family and friends should they fail to repay a loan (although you definitely shouldn’t lend to them again).  But you should take steps to make your intentions known, including a written agreement.  This could be as simple as an IOU or as complex as a legal contract, but between friends you should probably go with a basic document that includes the amount of the loan, the interest rate, and a schedule for repayment, as well as your signature, the signature of the borrower, and perhaps a notary public to act as a witness.  This document will hold up in court (should you find it necessary) and it will protect you from having to pay any gift tax (should the IRS require proof that the money was a loan rather than a gift).  Further, such an agreement will likely deter anyone who has it in mind to take the money and run.

You aren’t an ATM, so don’t let your family and friends treat you like one just because you have money.  You also aren’t a bank or a company that offers payday loans; if you were, you’d offer much less favorable terms.  Remind your family and friends of this when they come to you for money, and let them know that while you’re happy to do them a favor, you do expect them to live up to their end of the arrangement.  But if you feel uncomfortable about the situation or you’ve simply been burned too many times, simply say no.  Your family and friends might be mad, but they’ll come around eventually.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>