Nate Towers Discusses the Ramifications of Lending Money with AARP

Helping friends or family shouldn’t mean hurting your finances.

Nate Towers, director at Five Pathways Financial, recently spoke to AARP on the topic of lending money to family and friends. His comments were published in their article, 5 Dos and Don'ts When Lending Money to Loved Ones, on February 06, 2025.

Here are a few of the points Nate made:

Don’t Expect to Get the Money Back

“One of the most common mistakes people make when lending money to family and friends is expecting to get it back,” says Nate Towers, director at Five Pathways Financial retirement planning firm. “If you're going to lend money, you should assume that you might not be repaid. If you're OK with that, then go ahead, but if not, you need to take steps to protect both parties involved.”

In fact, according to a 2022 CreditCards.com survey, 42 percent of people who loaned money did not get repaid, and about half of Baby Boomers and Gen Xers said they got burned in such transactions.

“​​This is one of those situations where you need to ask yourself, ‘If I don’t get paid back, will I be OK?' " Towers says. “Be honest with your answer. If you lost 100 percent of what you're lending right now, could you handle it? Would it affect your financial stability in the long run?”

Don’t Tap Into Important Reserves

Furthermore, you shouldn’t tap into your emergency fund to loan money; reserve those funds for a rainy day of your own. And if you decide to use some of your retirement savings to help out a loved one, make sure it won’t throw your long-term plans off track.

“You should always prioritize your own financial security before lending to family, no matter how much you want to help,” Towers says. “If lending will jeopardize your retirement, it’s simply not worth the risk. Think of it like being on an airplane: They always tell you to put your oxygen mask on first before helping others. It’s sound advice in this situation.”

Create a Loan Contract and Put Its Terms In Writing

The contract you create to document any loan “should include key details, like whether you’ll charge interest, the repayment schedule, due dates and any consequences if the loan isn’t repaid,” Towers says. “You might even consider having another family member sign as a witness. For an added layer of legitimacy, you can also have the contract notarized at your local bank.”

A signed agreement reduces the potential for disputes and preserves goodwill. It’s also important tax-wise if the borrower fails to repay the loan.

“If you aren’t repaid, you may be able to claim a bad debt deduction, but only if you can prove the loan was legitimate,” Towers says. The loan contract provides this evidence.

Watch Out for Unexpected Tax Ramifications

If you loan out more than $10,000, you’ll need to charge interest on the loan—the IRS sets applicable interest rates you should charge monthly. “That interest counts as taxable income, and you'll need to report it on your tax return,” Towers says. “Depending on the size of the loan, this could push you into a higher tax bracket.”

Read the original article here: https://www.aarp.org/money/personal-finance/lending-money-to-loved-ones/

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