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If you lend money to family, don't expect to see all of it again

  • Adult children turn to their parents most often when in need.
  • Just 26 percent of loan makers say they'll never do it again.
  • Advisors recommend parents put the transaction in writing and consider charging interest.
Borrowing Money
Topp Yimgrimm | Getty Images

If you're thinking about lending money to family, know that it will likely never be repaid in full.

People who lend to their relatives end up getting about 57 percent back, according to a new study by 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.

"I'd advise not loaning money, but if you do, don't loan more than you can consider a gift," said certified financial planner Mike Keeler, CEO of Peak Financial Solutions in Las Vegas.

Despite getting short changed, just 26 percent of the 1,000 people surveyed said they'd never loan money again. That means most are fine with getting tapped for cash.

Where the money goes

Reason
Ave. amount per need
Down payment on a home $45,807
Debt $7,539
Home repair $5,795
Education $5,361
Other $5,284
Child costs $4,631
Medical costs $3,699
Monthly housing costs $3,434
Auto expenses $3,043
Food $666
Source: LendingTree

The study also showed that most loans come from parents: About 76 percent of men reported borrowing from their parents, compared with 63 percent of women. (Coming in a distant second, at about 10 percent for both sexes: borrowing from a sibling.)

Even when it's your child, experts say, you need to make sure you can afford to lose the money.

"Don't go into debt to finance your child's debt," said Brian Karimzad, vice president of research at LendingTree.

It's also important to make a tough-love evaluation of whether the loan is needed, Keeler said. While some situations are justified, other times it's the child's own actions that set the stage for financial woes.

"Sometimes it's tough to say no, but it's the right thing to do," said Keeler. "Maybe the person needs to make better lifestyle choices.

"If they have poor financial habits, you shouldn't enable it."

Documenting the transaction also can be useful. While there's no need to draw up legal forms, putting something in writing — even if handwritten — "helps the child have a sense of commitment," Karimzad said.

He said the document can be as simple as describing the amount borrowed and the pay-back plan.

And while most people don't try to earn money on the loan — 95 percent say they wouldn't charge interest — it is something to consider so you're not viewed as a cash vault.

"Don't go into debt to finance your child's debt. " -Brian Karimzad, vice president of research, LendingTree

"If you charge interest, it says this definitely isn't a gift," said Keeler. "Sometimes you have to charge interest to be taken seriously about being repaid on a regularly payment plan."

Also make sure you make sure you aren't being taken advantage of if you're approached by someone outside your immediate family.

"The more distant the relative is, the more vetting you'd want to do," Karimzad said. "You always want to help your own kin, but the reality is that sometimes human beings don't have the best intentions."