Liam Gibson, Wealth of Geeks
Mixing money and friendships can be an emotional minefield at the best of times, let alone during a downturn.
Yet as the economy wavers, informal lending is on the rise. Census Bureau data shows over 25 million people nationwide relied on financial help from friends and family in early April 2022, a jump from around 19 million a year earlier. With the US facing a likely recession in the coming months, more Americans may get requests for a bail-out from their nearest and dearest.
This article will look at a new app that claims to make this awkward process more manageable, examine what survey data shows about personal lending regrets, and consider some advice for experts on how to best handle these tricky situations.
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Friends with deficits
Loaning money to friends and family can be a fraught territory. While it may seem as if you are doing a good deed to help someone in need, surveys show that people regret doing it more often than not.
According to a recent survey from CreditCards.com, nearly 60% of those who had lent money to friends or paid for a group expense had a bad experience. There were negative consequences, such as financial loss or a damaged relationship, with 10% revealing that lending to friends had hurt their credit scores.
“You need to be careful about lending money to friends because it changes the nature of the relationship,” said Christine Luken, financial dignity coach and host of the Money is Emotional Podcast. “I advise my clients to only lend money if: a) It won’t hurt them financially if the loan goes bad, and b) they wouldn’t be mad at the person if the loan wasn’t repaid.”
The younger generation is also more vulnerable to getting burnt from lending too much money to friends or family. The survey showed Gen Z and Millennials are more likely to experience a negative experience than Gen X and Boomers, probably reflecting their relative lack of experience with handling money matters.
“It’s typically not a great idea to lend money to family or friends,” said Amir Noor, Director of Financial Planning at United Financial Planning Group.
“It’s a fully unsecured loan, and you’re probably not going to run a credit check on them. If they had good enough credit, they’d probably use an online personal loan, so the fact that they’re going through you means they probably don’t have access to other avenues for loans.”
If you do lend money to friends and family and you expect that money to be paid back, make sure you trust the person. If the relationship lacks trust, there is a good chance you may not see that money again.
If you do not feel comfortable about lending, Luken suggests having a no-lending policy. She typically tells those requesting the money that “my relationships are too important to have something like money come between us.’”
While small loans are treated like gifts, past a certain point, tax applies.
“If the sum exceeds the annual gift tax exclusion ($17,000 in 2023), you as the donor are subject to paying gift tax,” says Marianne Nolte, CFP and Founder of Imagine Financial Services.
The same can go for if you are charging interest on the loan. If the principal exceeds $10,000 and there is interest being charged, it will become taxable income.
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An app for that
There are now apps that help with tracking these loans, like Pigeon. Founder Brian Bristol created the app during the pandemic after his experience lending money to a family member in need.
“There is often guilt, shame, and fear associated with helping friends and loved ones with money, and that shouldn’t be the case,” Bristol said.
Pigeon is launching their highly anticipated app that will be available on iOS and Android app stores, allowing individuals a unique way to loan out money to their family and friends. The app will be available in more than 40 different countries and free to use.
“I just heard of Pigeon and immediately signed up,” said Noor, who found it very useful. “I think it’s a great way to track loans to friends and family and also assess an interest rate.”
Since 2020, Pigeon has grown to over 18,000 downloads and has helped family and friends lend over $2 million. The app educates its users about personal loans, relevant taxes, and financial tips through its blog, The Nest.
Overall, lending money to friends and family is complex and perhaps best avoided in most situations. Yet life is not always so simple.
If it is the appropriate thing to do, set clear expectations at the outset. Consider either using an app together or simply formalizing the terms in writing so you are on the same page. Ultimately, money shouldn’t be the reason two friends break apart. Handle these situations with care, and you should be able to navigate and come out the other side with your bank account and relationships intact.
