The smart way to loan money to friends and family

What’s a few hundred (or thousand) dollars between friends and family, right? In an ideal world a helping hand offered between loved ones shouldn’t cause strife, but anyone that’s ever helped a pal or relative with money understands that playing bank can sometimes result in hurt feelings and misunderstandings.

Most of the trouble may arise from expectations for both parties. In the April issue of MoneySense one reader asked how he could recoup $1,300 that he loaned to his brother more than a decade ago. The brother receiving the loan had signed a promissory note claiming he would repay the loan in a year with interest, but never did.

Unfortunately for the brother with deep pockets, the note — just like the act of goodwill — doesn’t really mean anything so many years later. Legally there’s no action to be taken, said Toronto lawyer Barry Fish. To make that promissory note valid, the brother would have had to sue his brother two years after the loan was made.

Oprah’s financial guru Suze Orman offers people a kind of handbook for how to decide whether or not it’s wise to loan money to friends and family. She cautions the lender to consider all the particulars before making a decision either way, and to treat the situation as a business transaction.

It all sounds so simple. But there are few personal relationships that operate like businesses. That’s to their credit, really.

Promissory notes, threats of legal action, and sore feelings — it’s enough to discourage most people from sharing the wealth. But there may be an alternative view that lets both parties off the hook, though it’ll make financial experts cringe.

The alternative: if you choose to offer help then call money given between loved ones a “gift” not a “loan”. Gifts occasionally breed returns in goodwill, or at the very least good feeling.  By contrast,  loans between friends and family don’t seem to have the best track record when it comes to repayment or good feeling.