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How to avoid becoming a human ATM

CNBC logo CNBC 7/31/2018 Sarah O'Brien

Anyone who's ever had family or friends ask to borrow money knows it can be a tricky situation to navigate.

Saying no can be easy if you're struggling to cover your own expenses. Yet for those who can afford to part with the money, knowing how to set boundaries can be challenging.

"You don't want to be an ATM," said Daniel Wesley, founder of "It's nice to be in a position to help out, but it's better to make sure [the borrower] is working toward something so the loan is a means to an end versus something that enables them."

The reasons people ask to borrow money run the gamut, from needing it to pay for food or rent to wanting it for a big-ticket item like a car, house or college.

For women, the top reason is for basic necessities, with the average amount borrowed $678, according to a new CreditLoan report based on its recent online survey of more than 1,200 adults. For men, the top reason was education, with borrowers averaging about $15,000 per request.

For some people, leaning on others for financial help can be the only way they can cover their costs. A Federal Reserve report released in May showed that more than one-fifth of adults cannot pay their monthly bills in full. Additionally, 40 percent of adults would not be able to cover an unexpected $400 expense unless they sold something or borrowed money.

Regardless, it's important to carefully evaluate the borrower's request when you're asked to part with your money. While some situations are justified, other times it's the person's own actions — i.e., overspending or poor financial choices — that set the stage for needing money.

Related video: This mom turned a $2,000 loan from her mother into a $260 million fortune


"The one thing I always bring up to clients is to consider whether they are enabling the person," said Bryan Bibbo, an investment advisor and financial coach with JL Smith Group in Avon, Ohio. "Sometimes tough love is the better choice."

If you're approached, whether from a family member or friend, here are some tips for handling the request.

Ask what it's for

Whether someone wants to borrow $40,000 or $40, you have the right to know how the person plans to use the money. And the greater the amount, the more detail you should get on how and when it will be paid back.

It's one thing to float someone $50 until their next paycheck and quite another to fork over, say, $5,000 or more toward a down payment on a house. For larger amounts, financial advisors recommend putting the agreement in writing (more on that below).

Feel free to say no

This should go without saying: If lending money might put your own current or future financial security at risk, don't do it. And do not tap your retirement funds to loan money.

Also, if you don't think the planned use of the loan is wise, you have the right to say no.

For instance, say your brother wants $10,000 to invest in a business and he plans to use the earnings from the venture to pay you back. If you think the business idea is a pipe dream and the notion of future earnings is wishful thinking, don't loan the money.

"Don't be afraid to say no," Bibbo said. "If they gad mad, it will pass. But if you give them a loan and they don't pay it back, that will be for the rest of your life."

Set terms

If you decide to loan the money, there should be terms attached. For smaller amounts, you might be comfortable with a handshake agreement that it will paid back within a short time frame.

For larger amounts — which, again, should be in writing — you should make sure the document includes details on repayment. This should include specifics like the monthly payment amount and a date when the loan will be paid in full.

If the person will be paying you interest, include that information in your agreement.

While you might be disinclined to charge interest to someone you're close to, the IRS could consider it a gift if the loan is above the yearly gift exclusion ($15,000 for 2018) and comes with no interest.

Because everyone's situation is different, it's important to consult your advisor to find out how a loan will impact your bottom line at tax time now and in future years.

Once the terms are set and in writing, you both should sign and date the agreement. This way, there can be no dispute down the road over what was agreed to.

"When it's in writing, everyone understands the parameters," said certified financial planner Mark Byelich, principal of Wealth & Advisory Associates in Newtown, Pennsylvania. "Otherwise everyone could walk away with a different interpretation."

Accept that you might never get it back

Depending on the borrower and the circumstances of the loan, you might never see the full amount repaid.

People who lend to relatives end up getting about 57 percent back, according to a 2017 study from LendingTree. The average amount across all generations for people who report having loaned money in their adult life is $5,022 and, of that, an average of $2,857 has been repaid.

"Loaning to family or friends is a little like gambling at the casino," Bibbo said. "Don't loan more than you can afford to lose."

Bibbo said resentment has a way of building over time if you are counting on repayment and don't get it.

"I've seen parents cut a child out their will entirely because they were upset that a loan wasn't paid back," he said.

The bottom line is that your relationship with the borrower could deteriorate if you don't manage your own expectations.

"If you're OK with the possibility of the money not being returned, then it's probably fine to loan the money," Byelich said. "But if you're not comfortable with that, it's probably not a good idea."


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