Dave Ramsey says family lending should come down to only two choices

A caller to “The Ramsey Show” described how a six-figure family loan turned into a total loss. She and her husband had given about $200,000 to her sister and the sister’s boyfriend to start a countertop company that later failed.

The business went under several years ago, the couple broke up, and the caller was left facing an ugly decision: sue or move on.

Host and personal finance author Dave Ramsey gave the same advice he has repeated for years: either treat money given to relatives as a gift or do not lend it at all.

The caller’s situation highlights a larger issue that comes up when family financial help goes wrong.

Ramsey’s hard line on lending to relatives

Ramsey said that labeling a family transfer as a loan creates two ways to lose, because the lender risks both the money and the relationship.

When a relative cannot repay, the conversation often gets avoided, and that silence can weaken the bond on both sides over time.

He made the rule unmistakably clear during the episode:

Never loan family money under any circumstance. If you have the money, you think they need it, and you want to give it to them, give it. But if you won't give it to them, then you shouldn't be doing this.

A YouGov survey of 2,225 adults, commissioned by Bankrate, found that 44% of people who financially helped a relative or friend had a negative outcome. In that same group, 38% said they lost money, and 23% said the relationship suffered.

According to Ted Rossman, former principal analyst at Bankrate, lenders in those situations ended up getting hurt in one form or another, whether through lost money, credit damage, or a damaged relationship.

Why the tax code is more friendly to gifts than informal loans

The divide between a gift and a loan also matters under federal tax law, since the Internal Revenue Service draws a sharp distinction between the two. A gift within the annual exclusion typically requires no filing, while an informal loan usually demands a level of paperwork many families do not complete.

Intrafamily loans are supposed to include a signed agreement, a set repayment schedule, and an interest rate at or above the IRS Applicable Federal Rate (AFR).

If those requirements are missing, the IRS can treat the arrangement as a taxable gift, and the lender may owe tax on interest that was never collected, according to Charles Schwab.

The gift approach avoids that complexity. The annual exclusion allows each person to give up to $19,000 per recipient without filing, and married couples can use gift splitting to double that to $38,000, while the lifetime exemption is $15 million per person, the IRS says.

For most households, those thresholds mean gift tax is not a practical concern, which removes much of the incentive to structure family help as a loan.

How a $200,000 loss can affect retirement income

The caller’s $200,000 loss carries a serious effect for anyone living on retirement savings, because the damage is not limited to the original transfer.

Using the often-cited 4% withdrawal rule, that amount represents about $8,000 in yearly spending power, according to 24/7 Wall St.

For someone with $400,000 in savings, giving away half would reduce annual income from $16,000 to $8,000, a 50% decline that can reshape everyday life. For a retiree with $2 million, the hit is less severe: $200,000 is 10% of the portfolio, so annual income would fall from $80,000 to $72,000.

That contrast reflects Ramsey’s “if you have the money” test, which functions as a retirement-income stress check. He would likely reject a gift that cuts a modest nest egg in half, even if the same amount would barely affect a larger portfolio.

The loss grows even larger once investment growth is considered, because $200,000 earning an average 7% annual return could become about $393,000 over a decade, 24/7 Wall St noted.

That means the caller did not just lose the original money; she also lost years of potential growth that her retirement portfolio can never regain.

What to consider before helping a relative with money

Schwab says the decision to give money as a gift or extend a loan depends on the strength of the family relationship and the people involved.

In other words, there is no universal answer. The responsibility falls on the lender to judge whether the specific borrower is likely to follow through before any money changes hands.

Rossman offered a simple rule for anyone leaning toward helping: never lend more than you can afford to lose. That approach treats family transfers as gifts rather than debts, which Bankrate says can reduce risk for both the relationship and the lender’s finances.

Ramsey reaches the same conclusion: the only safe family transfer is one the giver is already prepared to lose entirely. Anything short of that, in his view, should not happen.

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