Don’t Let a Loan Ruin a Relationship

Now that banks have tightened their lending standards, it is more difficult to borrow money —even for those with stellar credit. So what do you do if you need a loan? Many people are turning to friends and family to borrow funds.

The New Jersey Society of Certified Public Accountants (NJSCPA) offers some ideas to prevent the loan from damaging a good relationship.


Consider Alternatives
Borrowers who fail to repay bank loans may face legal problems, but those who can’t make good on loans to friends or family can face not only legal trouble but also the loss of a personal relationship. That’s why it’s a good idea to think about all your options before approaching someone you’re close to for a loan. Try more than one bank, or explore borrowing from a credit union or other source. Instead of taking a loan, see if you can decrease your spending or postpone major purchases until you have saved the money you need.

Get It in Writing
One pitfall of a loan between friends or family is the informality. A handshake is a popular way to cement a deal, but a written document is a better idea for both sides. That’s because problems can arise when the friend lending the money expects it to be returned within a short time, while the borrower believes he or she can pay it back over an indefinite period. When lending money to a loved one, it’s often hard to insist on knowing when the loan will be paid or to ask for regular payments. To protect your relationship and your wallet, it’s best to put it in writing. Write down the amount of the loan, when and how it will be paid off and if the borrower will pay any interest. This kind of promissory note clarifies the borrower’s responsibilities and can help prevent misunderstandings later. The note should be signed by both parties, and each one should keep a copy.

Be Realistic
While written documentation is a great idea, it will not prevent potential payment problems. That’s why it’s important for both people to be realistic before they enter into the deal. If you know that a loved one likely won’t be able to repay you, offer instead to help him or her solve financial problems by developing a monthly budget or creating a payment plan with creditors. If you are uncertain you will be able to repay a loan, consider asking loved ones to brainstorm other borrowing options. Doing so may preserve your relationship long after any money problems subside.

Give Honest Updates
If you borrow money from a friend or family member and find that you are unable to repay it as expected, let them know about the problem right away. Explain what went wrong and when you can make good. It may be a difficult conversation, but your candor and consideration for the other person will go a long way in helping to preserve the relationship.

Consult Your CPA
No matter what your financial concerns, be sure to turn to your local CPA for advice. He or she can help you find answers for all your financial questions. If you don’t have a CPA, you can easily locate one online using the NJSCPA’s free, online Find-A-CPA service. Just go to, and in a few clicks you can locate a highly qualified professional who can assist you.
For more information on various personal financial matters, visit the NJSCPA’s public service website at While visiting, you can subscribe to Your Money Matters, the NJSCPA’s free, monthly email newsletter to receive valuable personal financial planning advice throughout the year.

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