“Neither a borrower nor a lender be,” William Shakespeare wrote in Hamlet. Yet most of us have been both. Sometimes the transaction has turned out fine – borrowed funds are repaid and everyone is satisfied. But at other times, especially when family members are involved, a simple loan can create tension, resentment, and broken relationships. Perhaps we should amend Shakespeare’s quote to add, “especially when family members are involved.” 

Yet the fact is, millions of us will either borrow from or loan money to a family member. There are times when such a loan is both generous and appropriate. But as this article from Investopedia explains, if you plan to enter into a family loan, there are important warnings to heed and precautions to take before any money changes hands. Follow this advice, says the article, and the risk of a relationship breach is diminished considerably. 

The Investopedia article was written by reporter Brian O’Connell and first published in July 2024. (We’ve updated a few of the statistics.) We’re featuring it here on the Blog as part of this week’s focus on families and estate planning. Can you loan money to a loved one and have it all turn out well? Let’s take a closer look. 

Economic Climate Demands a Cautious Approach to Lending 

O’Connell begins with a sobering statistic about the debt landscape in this country: “The Federal Reserve Bank of New York has reported that U.S. household debt increased by $185 billion in the second quarter of 2025. Delinquency rates rose as well across all types of loans.” 

Because of this, he adds, it can be difficult to refuse a family member’s earnest and well-intentioned request for a loan. But before you hand any funds over, consider the following warnings and wisdom.   

Family Loans are the Quickest, Cheapest Source of Needed Funds 

O’Connell explains that It’s no secret why people often turn to family when they’re in financial trouble: consumers have limited options when they need to get their hands on some ready cash in tough times.  
 

“They can go to their banks if their credit scores are healthy but they’ll have to pay interest on top of the amount of money they borrow,” he writes. “They may also have to pay loan initiation or origination fees in some cases. These are fees charged by lenders to process applications. They can be as much as 1 percent or more of the amount of the loan.” 

Financing isn’t cheap, as Steve Trumble, co-founder of American Consumer Credit Counseling, points out. “Americans are turning to friends and family for loans rather than the big banks to avoid spiraling into more debt and defaulting on regular payments,” he says. “Even though consumer and student loan debts have each surpassed the trillion-dollar mark, young Americans are still the most willing to help out friends and relatives in need, which could exacerbate their own debt as well.”  

The quickest and least expensive option is usually a loan from a friend or family member. But that doesn’t automatically make it the wisest option for everyone.  

The Key: Keep Your Emotions Out of the Transaction  

O’Connell advises that if you plan to enter into a lending relationship with a friend or family member, all parties should treat it as a business loan and leave emotions out of it. That’s especially true, he says, if you expect the money to be repaid and you want to keep the relationship healthy and intact when all is said and done.  

Trumble says, “By treating loans between family and friends as a business transaction, consumers can safeguard themselves from damaging an important relationship because of money. Although you might feel inclined to help out a loved one with finances, it’s important to openly communicate about repayment expectations so that no one is left in the dark, or worse: in the red.”  

Control Your Expectations Regarding Future Repayment 

Experts also agree: it’s generally best if you don’t expect to get your money back. “Go into a family loan situation with the mindset that you’ll never see the money again,” O’Connell writes. “That’s not saying that you won’t but you won’t be as disappointed when and if the loan does go un-repaid.” 

Mary C. Kelly, author of the book Money Smart, advises reframing the concept of the loan entirely if you can. “There are no such things as loans among family and friends—they’re gifts,” she says. “They are a gift if you give or receive them and they are a gift if you get paid back.”  

If the Loan is Repaid, Expect the Process to be S-L-O-W 

Kelly urges us to remember that the nature of a family loan—already more casual, with no professional obligations attached to it—changes the dynamic, makes it feel like the stakes are lower.  

“The reason people need loans from friends and family is that they typically cannot get a loan anywhere else,” she explains. “The financial institution won’t give them a loan, or if they do, the interest rate will be too high to be helpful.”  

Because of this, she says, people who borrow from family and friends will automatically consider these loans in a much less serious light than they would consider a loan from a bank. Therefore, they will be more casual about returning the money. There’s no way to win.  

“With close family and friends, you really cannot demand collateral or interest payments and expect to keep a good relationship,” she adds.  

Before You Lend, Ask Yourself These Questions 

Kevin Murphy, senior financial consultant at McGraw-Hill Federal, adds another tip to the mix: he advises having a checklist in hand before you lend cash to a family member.  

“Sometimes an individual may have no credit history or may have damaged his or her credit so severely that they will need to seek other alternatives,” he says. “A lot of times, this member will have no choice but to approach a family member for a loan. I always recommend to friends and family members to approach this as a business transaction.” 

He then poses what he considers the most important questions to ask yourself before you lend to someone close to you:  

Has this person asked me for money in the past?  

If so, was I paid back?  

Was I paid back promptly?  

What is the likelihood that I will be paid back this time?  

What are the funds to be used for? 

If You Expect Repayment, a Contract Boosts Accountability 

If you anticipate being repaid, O’Connell says, you need to consider how your loved one will be expected to pay you back. Your hopes might be unrealistic. 

“This is extremely important because most [borrowers] have good intentions,” Murphy says. “However, if their income is already accounted for paying all their other obligations, where will your ‘promise’ come in?”  

To this end, Murphy encourages having paperwork to hold both parties accountable. This can mitigate many of the common problems connected with family loans.  

“Just make sure the contract covers the all-important question of payments, particularly what happens if the loan goes unpaid,” he adds. “You may need to develop a couple of different repayment contingencies to provide for different scenarios.”  

You Can Make it a Gift, but Remember the IRS  

As previously stated, sometimes the healthiest option for everyone is to consider the money a gift, not a loan. But O’Connell warns that there’s an important factor in going this route, too.  

“The Internal Revenue Service (IRS) establishes tax rules for gifting,” he writes. “The annual tax exclusion for gifts is $19,000 in 2025, an increase from $18,000 in 2024. You’ll owe a gift tax if you give more [to any one individual] than this.” (Editor’s note: married couples can in effect give twice this amount: $38,000, or $19,000 per spouse.) 

He adds, “You can pay any gift tax you owe in the year it comes due if it exceeds that year’s annual gift tax exclusion. You can also apply the excess value of the gift to your estate tax exemption. This is often referred to as the lifetime exemption. It’s shared by the estate and gift taxes and applies to both.” 

Especially With Family Loans, Both Spouses Need to Agree 

If you have a spouse, it’s also vital to consider their feelings before lending any money to a relative. Murphy says, “If you lend a family member money, you can cause a strain to your cash reserves, but much more importantly, to your marriage. This is crucial. If approached, make sure you involve your partner right away.”  

Despite Your Best Efforts, Conflict May Still Arise 

O’Connell concludes his article with the reminder that you can’t always get ahead of conflict. All you can do is carefully plan ahead and hope for the best.  

“There’s no guarantee that a family loan won’t bring disappointment and conflict but that won’t necessarily stop you from helping the people you love,” he writes. “Having a plan is the best thing you can do if you agree to lend money to your family or a friend. Be sure to set expectations, draw up a contract, and make sure your spouse knows that the loan is happening.” 

Rajiv Nagaich – Your Retirement Planning Coach and Guide 

The long-awaited book by Rajiv Nagaich, called Your Retirement: Dream or Disaster, has been released and is now available to the public. Retirement: Dream or Disaster joins Rajiv’s ground-breaking DVD series and workbook, Master Your Future, as a powerful planning tool in your retirement toolbox. As a friend of AgingOptions, we know you’ll want to get your copy and spread the word.  

You’ve heard Rajiv say it repeatedly: 70 percent of retirement plans will fail. If you know someone whose retirement turned into a nightmare when they were forced into a nursing home, went broke paying for care, or became a burden to their families – and you want to make sure it doesn’t happen to you – then this book is must-read. 

Through stories, examples, and personal insights, Rajiv takes us along on his journey of expanding awareness about a problem that few are willing to talk about, yet it’s one that results in millions of Americans sleepwalking their way into their worst nightmares about aging. Rajiv lays bare the shortcomings of traditional retirement planning advice, exposes the biases many professionals have about what is best for older adults, and much more. 

Rajiv then offers a solution: LifePlanning, his groundbreaking approach to retirement planning. Rajiv explains the essential planning steps and, most importantly, how to develop the framework for these elements to work in concert toward your most deeply held retirement goals.  

Your retirement can be the exciting and fulfilling life you’ve always wanted it to be. Start by reading and sharing Rajiv’s important message. And remember, Age On, everyone! 

(originally posted at www.investopedia.com)