What to do when friends or family want to borrow money from you — Serious debt, or even considering bankruptcy? Debtfix New Zealand (2024)

Can you afford to lend someone money? Getting yourself into financial hardship is not going to help anyone.

Do you have a budget, and do you know what expenses you’re likely to have in the coming months or even years, if the person requests a large loan? You may be nearing retirement, about to start a family or saving to buy a home and being generous to a buddy may leave you out of pocket at a critical stage in your life.

The impact of lending money to family or friends goes beyond the moment when you agree to help them out, especially if you are generous enough to give them an interest free loan. If you can afford to lend money, it can be a great way to help someone you care about avoid high-interest loans and give them a hand up but check it won’t be a problem for you in the long run.

Are there other ways you could help a friend or family member?

Lending your mate some money may not be the best solution for their situation. It may be better to treat the situation with some tough love, which doesn’t mean being mean. Tough love is about setting boundaries and if you know family and friends are genuinely experiencing a hard time and you have the funds to help them, then that’s probably OK.

However, if there is more to the story and the person asking for the loan needs to deal with other stuff in their life maybe you shouldn’t give them a loan. You could offer to help by:

Will you arrange a written loan agreement?

If you decide to become the bank of mum and dad or the bank of a good mate, it might be useful to draw up an agreement, so everyone knows what is expected. Consider the amount and frequency of repayments, as well as what happens if they need to stop payments, or you need the money back in a hurry.

Xero has some great guidelines on arranging loans between friends and families, especially if you need some money for a small business, but the guidelines apply for any informal loan.

How to say ‘no’

Some people find it easy to say ‘no’ whereas many of us really struggle, especially when we care deeply about the person asking for our help. Just Google ‘how to say no’ and you’ll find screeds of advice, which clearly indicates this is a challenge many of us find difficult.

Some key points to turn down a buddy or family member when they ask for a loan are:

  1. Be clear about your ‘no’ e.g. “I’m sorry, my friend, but I can’t lend you money.” You don’t have to offer an excuse.

  2. Express your gratitude, e.g. “That you’ve asked for help with money does means a lot to me.”

  3. Set boundaries and stick to them, e.g. “I lent you $100 last month, and I can’t lend you more until that is repaid.”

  4. Be polite, offer an alternative but stay assertive, e.g. “I can’t lend you money right now, but I will let you know if I can in the future.”

Consider the impact if you say, ‘yes’ or ‘no’. If saying ‘yes’ puts you in a bad place, financially and emotionally, you’ll need to be courageous when you decline to lend money to someone.

Is someone forcing you or someone else to lend them money?

Every now and then there are media reports of people being forced to lend or even give money to others, especially family members. Financial abuse happens in many forms and can include failing to repay a loan to straight out theft of money.

Often other friends or family members first notice something is wrong when someone struggles to buy essentials they can normally afford, because they are being financially abused. The abuse may involve a scam or fraud, and online romance scams often involve someone asking their victim for a loan. Don’t do it.

You can protect yourself from financial abuse by getting independent advice before:

  • Signing any contract

  • Making any big decisions, like selling your home

  • Agreeing to be guarantor for someone’s loan, that could mean you have to pay back their debt if they can’t

  • Lending money to people you have met online

Older people are vulnerable to family members and colleagues exploiting their money and other assets. If you need to contact someone about elder abuse there is good information here and Age Concern can also help.

If you are bothered by lending money to someone and you think they could use some FREE non-judgement guidance from Debtfix, share our contact details with them, now.

What to do when friends or family want to borrow money from you — Serious debt, or even considering bankruptcy? Debtfix New Zealand (2024)

FAQs

What do I do if my friend wants to borrow money? ›

How to say no when family or friends want to borrow money
  1. LISTEN FIRST. If you say no too quickly, your friend or family member might feel ignored, hurt, discounted or insulted. ...
  2. ASK FOR TIME. ...
  3. MAKE A RULE AND STICK TO IT. ...
  4. BE FIRM. ...
  5. DON'T EXPLAIN OR MAKE EXCUSES. ...
  6. OFFER OTHER AID. ...
  7. RELATED TOPICS.

How can I legally borrow money from a friend? ›

Drawing up a loan contract that you and the borrower agree to and sign makes it clear what your responsibilities are, and it gives you grounds for legal recourse if you end up needing to sue them later to get your money back. At a minimum, your loan contract should include: Your name and the borrower's name.

How to respond to someone who wants to borrow money? ›

Some key points to turn down a buddy or family member when they ask for a loan are:
  1. Be clear about your 'no' e.g. “I'm sorry, my friend, but I can't lend you money.” You don't have to offer an excuse.
  2. Express your gratitude, e.g. “That you've asked for help with money does means a lot to me.”
Nov 3, 2022

What to do if a friend is in debt? ›

Be a friend

Love your friend, make time to listen to them, and help them feel safe and free from judgement. Many people in debt feel shame, so it's vital that you assure them you're not judging them. Don't push them to make any decisions, but say that you are there to listen and support them.

What would you do if a friend borrowed money and never paid you back? ›

Suing in small claims court

You don't need an attorney to sue in small claims court. If the total loan amount of your loan is above the limit, you may be able to divide it into parts and only sue on the unpaid balance. Unpaid loans between close friends and family are one of the most common cases in small claims court.

Can you make an interest free loan to a family member? ›

Tax implications: If the family loan is interest-free and over a certain amount ($17,000 in 2023 or $18,000 in 2024), the lender may need to file a gift tax return. If the loan includes interest, the lender must follow IRS interest rate guidelines and potentially report it as income.

What are the IRS rules for borrowing money from family members? ›

The IRS mandates that any loan between family members be made with a signed written agreement, a fixed repayment schedule, and a minimum interest rate. (The IRS publishes Applicable Federal Rates (AFRs) monthly.)

What is the legal document for borrowing money from a friend? ›

A personal loan agreement, sometimes referred to as a promissory note, is a legally binding contract between two parties. Although not always used, a personal loan agreement is a helpful document when lending money to a friend or family member.

What interest rate can I charge a family member? ›

6 Let's say you were giving a loan to a family member for $10,000 to be paid back in one year. You would need to charge the borrower a minimum interest rate of 4.30% for the loan. In other words, you should receive $430 in interest from the loan. In our example above, any rate below 4.30% could trigger a taxable event.

What is a good excuse to borrow money from friends? ›

A few emergency reasons to borrow money could include debt consolidation, car or home repairs, medical bills, moving costs, or a large necessary purchase.

What should I do if my friend is asking for money? ›

Express empathy and understanding for their situation and assert your financial boundaries. Remember that refusing their request is not a personal attack on the person asking for help but rather a responsible decision for your own financial well-being.

What to do when someone keeps asking for money? ›

When the stranger asks for money, say something like, "I'm sorry, I don't have any money to spare." You can also add, "I wish I could help, but I'm not in a position to do so right now." Don't engage in conversation. The more you talk to the stranger, the more likely they are to keep asking for money.

How to help someone in extreme debt? ›

  1. Give a Cash Gift. If your loved one is having a short-term cash flow problem, you may want to give an outright financial gift. ...
  2. Make a Personal Loan. ...
  3. Co-Sign a Loan. ...
  4. Create a Bill-Paying Plan. ...
  5. Provide Employment. ...
  6. Give Non-Cash Assistance. ...
  7. Prepay Bills. ...
  8. Help Find Local Resources.

What to do if your friend owes you a lot of money? ›

Ask the courts for help

This, again, should be done as a last resort, so it's always a good idea to seek independent advice first, such as that offered by a debt collection agency. When filing a claim against unpaid debts, keep the following in mind: It could be months before the court takes up your case.

How to help a friend get out of debt? ›

How to help someone in debt
  1. Spot the warning signs. The first way to help is to simply recognise the signs of financial distress. ...
  2. Be available. ...
  3. Help them budget. ...
  4. Help them find additional work. ...
  5. Plan inexpensive social events. ...
  6. Inform them about debt management options.
Jan 2, 2024

How to handle a friend asking for money? ›

Express empathy and understanding for their situation and assert your financial boundaries. Remember that refusing their request is not a personal attack on the person asking for help but rather a responsible decision for your own financial well-being.

Is it OK to borrow money from a friend? ›

Asking a friend or family member for financial help can feel awkward or put the other person in a difficult position. Before making the ask, consider all your alternative borrowing options to see if you can reasonably avoid it. Those with good credit might consider a personal loan or credit card to cover the cost.

What is the best way to borrow money from a friend? ›

In fact, preparing a short presentation that outlines why they should lend you the money can help them see how serious you are about the loan and understand why you need the funds. Include details like what you'll use the money for, how long it'll take you to repay the loan, and how much interest you'll pay in return.

How do you say no to a friend who wants to borrow something? ›

You can say, "No, I can't let you borrow that. It's special to me, and I don't want it leaving this room," or, "That's my favorite shirt, and I know you'll be careful when you wear it, but I would be really upset if something happened to it or it got ruined. You can borrow another one, though!"

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