3 steps to take to protect yourself if you lend money to friends or family

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Lending money to family or friends can feel generous and good, but it's important to protect yourself — or, research suggests, your relationships could suffer.

Six in 10 people who lent cash to a friend or family member expect to be paid back, according to a Bankrate survey of 2,490 U.S. adults. But more than a third (37%) of respondents say they lost money after lending someone cash, and 21% say their relationship with that person was damaged as a result.

If you can, avoid lending money, suggests Ted Rossman, a Bankrate industry analyst. "In fact, my No. 1 tip is just don't do it." Though Rossman acknowledges that it can be difficult to say no to someone who's asking for help, he says that
"about half of the time, something goes wrong," like you don't get paid back or your relationship is affected.

Here are three ways to protect yourself and your relationships.

1. Don't loan more than you can lose

"First of all, I wouldn't lend more than I could afford to lose," says Rossman, so if someone asks you for an amount that would leave you struggling to pay your own bills, say no.

Even with small loans, things can go wrong. Your friend could ignore your Venmo requests and leave you to cover his share of the dinner bill. Nearly three-quarters of Bankrate's respondents say they've gotten stiffed on the bill at least once when they used their credit card to pick up a dinner bill and expected to be paid back.

This also means you shouldn't lend your credit card to anyone, Rossman says. (Nearly 20% of Bankrate's respondents have.) The person borrowing your card could use it to overspend, leaving you on the hook for the bill. Plus, you won't have the same consumer protections in case of fraud as you would if your card is lost or stolen.

First of all, I wouldn't lend more than I could afford to lose.
Ted Rossman
Bankrate industry analyst

2. Formalize the repayment agreement

If you're loaning large sums of money to friends or family, it's important to have a conversation about terms of repayment, says Lisa Marie Bobby, relationship psychologist and clinical director of Growing Self Counseling & Coaching in Boulder, Colorado.

Instead of nudging frequently for payments, Bobby says to set a mutually agreed upon day of the month for the money to be paid back in installments. Then, you can send once-a-month payment requests on the first day of the month, for instance.

To hold the borrower accountable, consider putting an agreement in writing. Something handwritten can be fine. If you do decide to draw up formal documents, though, sites like Rocket Lawyer and Legal Templates have free samples of loan contracts.

3. Understand the risks of cosigning

If you're a cosigner on a loan, it means you're taking legal responsibility for the amount borrowed. In other words, you're responsible for the debt if the primary borrower doesn't pay. That's why cosigning is a risk and why Rossman urges against it. Indeed, 21% of those who cosigned a loan in the Bankrate survey report that their relationship with the borrower was affected.

If you're asked to cosign a loan, it may be because the borrower has limited credit history or a low credit score and can't get a car or private student loan without a cosigner who has stronger credit. Of the 21% of Bankrate's survey respondents who cosigned a loan, nearly half (45%) were cosigners on a loan for their child.

Cosigning a private student loan for your child to help pay for their education is one instance where you may be willing to take the risk. However, it's your credit score on the line, so make sure you're financially stable before doing so.

If you do cosign a loan for your child, Bobby says, you still need to be careful. She suggests having "a clear and explicit conversation going into it, because at the end of the day your relationship [with your child] is on the line."

Whether you're going to lend someone money or cosign a loan, Bobby says, always set clear expectations beforehand. If you're not willing to, she says, then "consider giving people gifts, instead of lending money."

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