4 Key Signs You’re Making a Mistake Lending Money to Friends or Family
Written by
Cindy Lamothe
Edited by
Rebekah Evans
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Everyone has that inner voice that tells them lending money to friends or family is a mistake — and yet, we often end up doing it anyway.
“When it comes to lending money to friends or family, emotions often cloud judgment, leading to poor financial decisions,” said Danny Ray, finance expert and founder of InsuranceForBurial.com. “Above all, if you’re unsure about their ability to repay, that’s a red flag you shouldn’t ignore.”
A common mistake he said people make is loaning money without setting clear terms. “For example, agreeing to ‘pay back when you can’ leaves room for misunderstandings and missed payments,” Ray said.
Below are the key signs you’re making a mistake lending money to friends or family, according to experts.
Looking for lending alternatives to share with your family or friends? Here are six ways to borrow money that are cheaper than using a credit card.
Lack of Transparency
According to Kevin Shahnazari, founder and CEO of FinlyWealth, one key sign that lending money to friends or family may be a mistake is a lack of transparency regarding their financial situation.
If the borrower is unwilling to discuss their financial challenges or provide details about how they plan to repay the loan, it raises red flags.
“Transparency is crucial; if someone hesitates to share their financial circumstances, it often indicates they may not have a solid plan for repayment.”
They Have a History of Financial Instability
Another sign, Ray noted that it’s a bad idea to lend money, is if the person has a history of financial instability. “In fact, lending money to someone who struggles with debt or has a pattern of overspending is likely to end in disappointment,” he added.
Shahnazari agreed that a significant indicator is the borrower’s history with money management. “If the individual has a track record of poor financial decisions or defaults on past loans,” he said, “this should serve as a warning.
“Understanding someone’s financial behavior can provide valuable insights into whether they are likely to repay borrowed funds,” Shahnazari added. “Past actions often predict future behavior.”
Furthermore, Ray advised to consider whether they’ve asked others for help before. “A revolving door of borrowed funds often signals a deeper problem, one that your loan likely won’t solve,” he said.
Before lending, Ray said it’s important to ask yourself some hard questions.
“Can you afford to lose this money? If the answer is no, it might be better to say no upfront,” he said. “Overall, treating personal loans like business transactions can protect both relationships and finances. Put everything in writing as this avoids confusion and sets expectations for repayment.”
You’re Being Asked To Pay a Group Expense
Another scenario to be cautious of, according to Ray, is covering a group expense with the expectation of being reimbursed.
“In fact, unless everyone agrees beforehand and you trust the group to follow through, it’s better to suggest splitting the cost immediately.”
“Lending money can strain even the strongest relationships. Above all, if there’s any hesitation or red flags, it’s wiser to offer emotional support or suggest alternatives like budgeting advice rather than risk damaging the relationship with unpaid debts.”
Consider the Nature of Your Relationship
Additionally to all of the above, Shahnazari advised considering the nature of your relationship with the borrower.
If lending money could jeopardize your relationship or if the borrower has previously taken advantage of your generosity, it is wise to reconsider.
“When personal relationships are involved, the stakes are higher; mixing finances with friendships can lead to resentment and conflict if expectations are not met,” he said.
Before agreeing to lend money, Shahnazari said it’s essential to evaluate these signs carefully.
“Doing so can protect your finances and your relationships,” he said. “Being cautious when lending money to friends or family is not just about finances; it’s about preserving relationships and ensuring mutual respect.”
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