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Picture this: Your brother-in-law, who owns a fledgling landscaping business, asks you and your partner for a loan to help him buy two new riding power mowers. He’s a close family member and a hardworking, trustworthy guy, but you have concerns about lending to family and friends. Turns out that’s wise.

Sometimes, these loans work out just fine: You provide genuine help and feel good about it, and you get your money back and on schedule. But more often than not – far more often – they don’t work out for the best. It’s typical for the money never to be repaid in full. Relationships suffer and can be ruined.

To Lend or Not to Lend

Lending money to family and friends is fraught with uncertainty. After all, there are complex emotional and personal factors at play, in addition to the financial ones. And so many questions:

  • Will you get the money back?
  • Should you allow for the possibility that you won’t be paid back, or that you’ll get repaid slower than expected?
  • Do you need it more for yourself?
  • What if you can spare it now, but lose your job or some other life event occurs – a medical emergency, say – and now you suddenly must have those funds?
  • Are you willing to risk changing the dynamic of this family relationship by introducing a possible conflict around money?

Some people take the stance of loaning money only if they’re OK with not getting it back – ultimately viewing it as a gift, and maybe even designating it as one from the start.

Complicating matters even more are the potential hard feelings between you and your partner if you don’t agree about the loan request. Your significant other wants to green light the loan for the landscaper. No, you counter, it’s not the right time.

Turn to the Plan

One way around this kind of impasse is to have a financial plan and base lending decisions against it.

Your financial plan is your roadmap. It establishes your priorities and helps you feel confident that you’re spending and saving in a way that aligns with them. With a plan in place, you can look at lending requests from a business standpoint.

When family is involved, of course, loans are more than simply business. But a business perspective is essential when considering the implications of lending money. A financial plan is your starting point.

If you are asked for a loan, hold the request up to your plan to gauge whether lending money makes financial sense.

Six Steps to a Financial Plan

Don’t have a financial plan? Hand in hand with your partner, follow these key steps:

  1. Take KeyBank’s survey to get a better understanding of where you currently stand and where you’d like to be.
  2. Write down your goals. By thinking about your goals, you can identify what’s most important to you and personalize your plan.
  3. Start an emergency fund, if you don’t have one. Having cash on hand for emergencies means you won’t have to divert money from your other goals when you face an unexpected expense.
  4. Pay off debts. This is another important component of a good financial strategy. Make sure you’re setting money aside to pay the minimum on each of your debts. If you can afford to, make larger payments toward the account with the highest interest rate.
  5. Decide how you’re going to spend your money. Be purposeful about your spending. Look at each category of your budget and consider whether your purchases are going toward things you really need.
  6. Create a monthly budget that outlines how you intend to save, spend, pay off debt and achieve your goals.

A good plan, which you should modify as your circumstances change, can help you manage your finances into the future. If you are asked for a loan, hold the request up to your plan to gauge whether lending money makes financial sense.

Get It in Writing

You’ve done the calculations and come to an agreement with your partner: “Yes” on the loan.

But before you dispense the money and your brother-in-law starts pricing new mowers for his fleet, put the agreement in writing. This can be tricky emotionally because you’re shifting from a family matter to a financial transaction. Make sure both parties understand the loan’s details, including the repayment schedule.

Seek help from financial, legal and tax professionals. If you’ve decided to provide a gift rather than a loan, be sure you understand the tax implications.

It’s well worth taking this time upfront to do it right and increase your chances of a happy family-lending experience.

This information and recommendations contained herein are compiled from sources deemed reliable, but are not represented to be accurate or complete. In providing this information, neither KeyBank nor its affiliates are acting as your agent or are offering any tax, accounting, or legal advice.

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