Money, family, and friends

Is it a good idea to lend money to family and friends? The answer is among the more difficult and contentious topics in personal finance.

I'm not an absolutist--there are times when it's the right thing to do--but I tend to be mostly in the don't-do-it camp. April Dykman at Get Rich Slowly is a reluctant bank to family and friends, too. But she recently loaned money to a friend and explained her reasoning in How to Lend Money to Friends (Without Ruining the Relationship). Among her key points:

I expected to not be repaid, and only loaned as much as I was willing to lose. My husband and I agreed that we would view the money as a gift, not a loan. If she paid us back, fine. If not, fine. I made it clear that we weren't expecting repayment.

Her friend's situation went from bad to worse, however. She wasn't repaid, but their friendship is intact.

Here's an alternative answer to a very different family loan question. A brother wondered if he should lend $50,000 to pay for his brother's new business start-up. He had carefully thought through the finances, but I wasn't convinced it was a wise course. I argued it was better for his brother to try and raise money outside of family and friends. Test his business plan in the market. However, assuming he does raise funds and his business gets launched:

My recommendation is to set up a mental account of money available to backstop your brother if money gets tight during the launch of his business. He might hit a stretch when it's a choice between tapping into the credit card or turning to you for a sum to tide him over. That's what brothers (and sisters) are for.

The bottom line isn't yes, do it vs. no, never do it. It's really think the loan through before deciding it's the right movwe to make. You don't want money to come between family and friends. That's a dismal outcome.

The housing market is about the run into another headwind. Yes, it's a slight breeze, but buyers will soon learn that it will cost fractionally to purchase a home. Rising mortgage fees announced by Fannie Mae are beginning to affect costs for borrowers -- even those with good credit scores.

In industry-speak, the fees are called "loan-level price adjustments" and new ones will go into effect April 1. The fees for conforming mortgages have been adjusted various times during the housing crisis, but this latest revision is an example of how even years into the housing downturn underwriting continues to tighten.

New-home sales may have unexpectedly jumped last month (by 17.5% compared with the previous month), but most housing market data point toward continued deterioration. For instance, home prices are heading down. The S&P/Case-Shiller Composite 20-city home price index fell by 1% in November from a month earlier (and a 1.6% decline from a year earlier). That said, Richard Florida, director of the Martin Prosperity Institute at the University of Toronto, highlights a critical divide in the housing market.

... it's clearer than ever that there are two distinct housing markets in the U.S. In the bubble cities and hard-hit rustbelt regions, the market has seen steep decline and may continue to weaken. But in knowledge-driven metros, tech centers, and big, dense cities, the market has stabilized and in some cases may be starting to rebound.

The same insight holds for the labor market.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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