Why Lending Money to Friends and Family Is Often a Bad Idea

In December 2024, while scrolling through Facebook, I came across a post by a young Gambian woman living in the diaspora—let’s call her “Mato” for privacy’s sake. Mato publicly declared her 2025 resolution: she would no longer lend money to friends or family. After extending sizeable loans throughout 2024, many of which went unpaid and even led to burned bridges, Mato vowed to protect her business and personal finances by refusing further requests for credit.

As a personal finance advocate, I found her resolve fascinating and courageous. By January 2025, I decided to explore just how common—and damaging—this dilemma is. I drafted a short questionnaire, and 18 readers kindly shared their experiences. Meanwhile, Mato’s original post garnered over 300 likes and 50 comments in just a few days, underscoring how widespread the problem has become.

My informal poll and recent studies reveal a sobering truth: while wanting to help loved ones is natural, the risks often outweigh the goodwill. In the United States alone, 60% of people have lent money to friends or family expecting repayment, yet a similar percentage report strained relationships or financial loss. These monetary disputes can leave scars that far outlast the dollars involved.

In this article, we’ll review the poll results alongside secondary research to demonstrate why lending to those closest to us so often backfires—and why, if you can afford it, framing support as a gift rather than a loan may be the best way to preserve both your finances and your friendships. You can read the full poll report here.

The Common Practice of Personal Lending

Lending money to friends and family is remarkably prevalent in our society. According to recent surveys, roughly 31% of Americans report that a loved one owes them money, with a median amount of $400. This practice cuts across generations, with Gen Zers more likely than other age groups to lend money (46%), followed by millennials (37%).

People typically turn to friends and family for loans in specific circumstances. Many borrowers seek funds to make debt payments, cover meals, and pay bills. These loans often occur when the borrower wouldn’t qualify for a traditional bank loan due to insufficient collateral or credit history, or when they need funds urgently. In these situations, loved ones become the lender of last resort—or sometimes the first option—due to convenience and personal connection.

The Borrower’s Perspective

From the borrower’s standpoint, approaching friends or family for financial assistance is frequently driven by necessity rather than preference. Many feel embarrassed- survey data shows that 44% of UK adults say embarrassment would prevent them from asking to borrow money from loved ones. However, when traditional lending institutions aren’t accessible or responsive enough to urgent needs, turning to one’s network may seem the only viable solution.

Potential Benefits of Friend and Family Loans

Despite the risks, friend and family loans offer advantages in specific situations. These benefits help explain why such lending arrangements remain common despite their potential downsides.

One significant advantage is accessibility. Unlike formal lending institutions that require extensive paperwork, collateral, or a strong credit history, borrowing from friends and family can be relatively straightforward. This accessibility makes it an attractive option for individuals who may not qualify for traditional loans, such as young adults just starting their careers.

Friend and family loans also typically offer more flexible terms than bank loans. Borrowers can negotiate repayment schedules, usually with zero interest rates, and other conditions directly with their lenders, making it easier to tailor the arrangement to specific needs and circumstances. This flexibility can be particularly valuable for those navigating temporary financial difficulties.

The Significant Challenges and Risks

Despite these apparent benefits, the challenges of lending to friends and family are numerous and often underestimated.

Relationship Damage

Perhaps the most significant risk is the potential damage to relationships. Research consistently shows that mixing money with personal connections frequently leads to adverse outcomes. Nearly half of those who have lent money to loved ones report regretting their decision, and about one in six say money issues have completely ruined a relationship. According to some studies, 75% of individuals who lend money to friends or family experience negative changes in their relationship dynamics.

In our poll of 18 respondents, primarily based in the Gambia, 67% also reported that their relationship was strained or severely damaged.

These statistics reflect the emotional complexity that emerges when financial obligations enter personal relationships. What begins as a generous gesture can evolve into resentment, particularly when repayment isn’t forthcoming or conditions aren’t clear. Every day, interactions become strained as the debt looms over both parties.

When Cousin Ahmed bails on the family reunion or your friends don’t show up at movie night, you’ve got to wonder—who’s sitting on unpaid IOUs in this crew?

Expectations and Misunderstandings

Friends or family members seeking loans often expect preferential treatment- better interest rates, if any, or more lenient repayment terms.  In some cases, the repayment of money borrowed from friends becomes less of a priority for the borrower. These expectations can make it difficult to maintain boundaries while fulfilling these hopes. Without clear written agreements, misunderstandings about loan terms are common, leading to conflicts that might have been easily prevented.

Financial Risk to Lenders

For lenders, there’s substantial financial risk involved. About 42% of people report losing money when lending to friends or family. This figure suggests that well-intentioned loans frequently become unintentional gifts—a transition that can strain not only relationships but also the lender’s financial stability. Our survey shows significant caution about future lending, with half the respondents unsure about lending again.

Financial experts consistently emphasize that individuals should only lend what they can afford to lose entirely. Unfortunately, emotional connections often override financial prudence. Like the case of Mato mentioned in the introduction, many lenders jeopardize their financial health by extending loan amounts they can’t afford to write off.

Best Practices If You Decide to Lend

If you consider lending money to a friend or family member despite the risks, following certain best practices can help minimize potential problems.

Protect Your Own Financial Health

In the Gambian proverb, you do not give your eyes to your in-laws while walking in the dark. In our context, you do not lend money to others while you suffer. Hence, financial experts unanimously recommend taking care of your finances first. Before lending money to others, you should have a steady income, limited debt, and an emergency fund.

Therefore, set a clear limit on how much you can lend, specifically, an amount you could lose entirely without it causing financial hardship.

Get Everything in Writing

One of the most critical steps is documenting the loan agreement. Today, with generative AI like ChatGPT, you can draft a simple loan agreement. However, having a lawyer draw up a formal contract may be advisable to protect all parties involved for larger loans.

Documentation will not minimize conflicts; however, it can also help if one of the parties denies the loan, and the loan still needs to be paid.

Assess Repayment Likelihood

Consider how likely you are to get your money back. You’re more likely to be repaid by someone facing a one-time financial crisis with a history of reliability than someone with a pattern of financial irresponsibility. This assessment should be objective rather than emotional- a difficult but necessary step.

Alternatives to Direct Lending

Rather than lending money directly, consider alternatives that might better serve both parties. One option is to refer friends and family to professional lenders like microfinance or micro-credit. Another option might be co-signing a loan application, though this carries its risks, including potential damage to your credit standing if the borrower defaults.

Conclusion

While the desire to help loved ones financially is understandable and helpful in our society, especially for a good reason like starting a business, the statistics paint a clear picture: lending money to friends and family frequently leads to damaged relationships and financial losses. The emotional complexity of these arrangements often overwhelms the good intentions behind them.

Before transferring funds to a friend or relative in need, carefully weigh the potential impacts on your relationship and finances. Consider whether your temporary financial relief might come at the cost of a valued relationship. As they say, you either lose your friend or money. In many cases, the wisest course of action may be to find alternative ways to offer support, whether through professional referrals, financial advice, or assistance, that don’t put your relationship at risk.

On the other hand, if you are a borrower, please do what it takes to pay the lender. When you default, especially without proper communication or any sign of care, the lender loses hope of lending to all other friends or family members.