by Michael Hart, CFP®
Investment Advisor Representative
[email protected]
Chances are, most of us have either been asked for a loan by a family member or know someone who has. Ideally, these loans are repaid on time without issue. But sometimes, repayments are delayed—or worse, never made—leading to strained relationships.
I can speak to this from personal experience. If you’re wondering how I got into financial planning, it all began with a loan.
When I was a freshman in college, I borrowed $1,400 from my grandfather to buy a guitar. Around the same time, like many college students, I got my first credit card—and then another, and another. Before long, between working part-time and attending school full-time, most of my income went toward credit card payments. I started to feel guilty about not repaying my grandfather. So, I did what many 18-year-olds might do: I avoided the issue entirely. I stopped visiting my grandparents regularly.
Eventually, I mustered the courage to visit my grandfather and explain the situation. I told him about my mounting credit card debt and why I hadn’t repaid him for the guitar. When I finished, he simply looked at me and said, “I thought you were smarter than that.”
I was crushed. That moment sparked a turning point. I went to a bookstore, read every personal finance book I could find, and got to work paying off my credit cards. Before long, I repaid my grandfather. It was a tough but invaluable lesson about money and relationships, one that ultimately inspired my career in financial planning.
Fast-forward to today, and there’s an app for situations like this—several, in fact. Platforms like Namma, Pigeon, and Zirtue have facilitated more than $100 million in loans between friends and family members since 2020. These apps offer practical tools and even assist with tax record-keeping, reducing the emotional toll of personal loans.
These platforms turn verbal agreements into official, written contracts, keeping track of payments and terms while ensuring compliance with IRS guidelines, such as establishing a fixed repayment schedule.
Family members can define terms like loan duration, interest rate, and repayment schedules. Some services, such as Namma, also recommend staying within state usury laws, which cap the maximum interest rates lenders can charge.
Consider Another Option: Gifting
Of course, there’s another approach to consider—one we discuss with many of our clients: gifting.
If you have the means, gifting money rather than lending it can remove the uncomfortable dynamics of a loan. As a bonus, you get to enjoy the satisfaction of seeing your loved ones benefit from your generosity.
If you’d like to explore gifting strategies or have questions about lending to family members, feel free to reach out. Peter, Rob, Kyle, Nick, and I are always just a phone call or email away.
Have a great weekend!