Loaning money to friends and family

BY FARNOOSH TORABI | Special to amNewYork

May 10, 2006

A friend who's short on cash asks for $20 to pay for a meal. A cousin who's starting a business asks for a few thousand bucks to help get it started.

Each issues the same promise: "I'll totally pay you back!"

"But the problem is, people forget," said Chuck Groom, co-founder of BillMonk.com, a free Web site that helps people track how much money they owe friends and family and vice versa.

So how do you get back your money without ruining a relationship? Should you charge interest? Here's some expert advice:

Set limits

A lender must be comfortable parting with the money. If you're up all night worrying about whether you'll be paid back, it's probably a sign that you shouldn't give the loan.

Bottom line: "You shouldn't lend money you don't have," says Jeffrey Strain, founder of savingadvice.com. "If you have credit card debt, then you should be worrying about your own finances."

Cash-poor friends and family begging for money should be able to relate. Be honest and say, "Sorry, I wish I could help, but money is really tight right now for me, too."

For small loan requests, such as when a suddenly wallet-less friend needs money at the end of a meal, "Social Savvy" author Judith Ré suggests saying, "I'll treat you this time and you can pick up the tab next."

And don't be shy about cashing in at the next meal.

Lending $5? Kiss it goodbye

Anyone who gives a friend $5 for a cab ride shouldn't expect to see that money again.

"The best policy for small amounts is to never lend money that you expect back," Strain says. "There isn't going to be a contract, most likely, and it isn't worth losing a friendship over."

And if a certain friend or family member doesn't return the favor, let that be a lesson for the next time he or she asks for money.

For big loans, put it in writing

For loans greater than $100, you may want to devise a written contract stating how much was borrowed, who owes what, when it needs to be paid back and whether it will be returned in increments or all at once. If you get the contract notarized, it gets recorded as a legal document.

As for interest, Strain of savingadvice.com sees no problem with charging loved ones interest, considering your money could be earning up to 4% APR in an online savings account.

"If they balk when you mention interest, that's a good sign you shouldn't be lending to them," he said.

Circlelending.com is one Web site that helps friends and family contract and manage their private loans with payment schedules and the option of setting interest rates.

(With Tim Chan)

Farnoosh Torabi is the business producer at NY1 News.