Three words come to mind to answer this dreaded question: Don’t Do It. Most financial experts would tell you to avoid lending to family altogether, and I would agree for the most part. However, before you simply write off that next relative who asks for cash, you might help them by having a few of these alternatives ready. If you actually decide to lend, we’ve included some tips that definitely should be considered before forking over any of your hard earned money!
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Before You Lend To Family…Consider This:
1. Is the family member good at keeping their word?
This should be an easy question to answer. If you’ve known someone for most of your life, you can look back to times where they’ve always pulled through, or have really been flaky. Past performance here is a pretty good indicator of what’s going to happen in the future, so keep this in mind if they ask for money.
Also ask if they’ve ever borrowed from another family member or close friend. You should know if this is something they often do, or if they’re coming to you as a last resort.
2. What’s the purpose of the loan?
Do they need money for college textbooks because their financial aid will be a month late? Or, do they want to pay down their overwhelming credit cards? The first scenario is much less risky, while the credit card situation has an underlying behavioral issue that could leave you high and dry.
If You Decide To Lend…
1. Don’t lend more than you can afford to lose.
This is the best advice for lending to family or friends. In fact, you should always consider it in your head to be a gift. You obviously don’t want to tell them that you aren’t expecting the money back. However, when you set your expectations like this, you can walk away from the loan with less damage if they fail to repay the loan.
2. Set clear terms for the loan.
This is money we’re talking here, so don’t hesitate to draw up a contract with all the terms clearly defined. You want to make sure each party understands:
– repayment expectations: length of loan, interest, monthly payment
– how late payments are handled: penalties, extensions, etc.
– collateral: what they lose if they default on a loan (a TV, iPod, guitar, etc)
3. Look at legal and tax consequences.
Depending on the size of the loan and interest involved, you might have a tax liability when you lend to others. In the same way, the borrower might have additional tax liability if they default on a loan.
Before you loan to anyone, be sure that you have sound legal documents and a good tax preparer.
Alternatives To A Loan
Treat it as a gift – If the loan is a smaller amount (like $20- $100), and you can afford to lose the money, consider giving it to the person as a gift. Luke 6:34-36 puts it best:
34 And if you lend to those from whom you expect repayment, what credit is that to you? Even sinners lend to sinners, expecting to be repaid in full. 35 But love your enemies, do good to them, and lend to them without expecting to get anything back. Then your reward will be great, and you will be children of the Most High, because he is kind to the ungrateful and wicked. 36 Be merciful, just as your Father is merciful.
Sponsor a class like FPU – If a person is really struggling with their finances, the best support might be to pay for their enrollment into Financial Peace University. If a local church is holding a FPU course, offer to pay the cost and help them transform their finances.
Buy or lend a financial book – If you have a copy of Dave Ramsey’s Total Money Makeover, you can lend or give it to a friend as a way to help them get their finances under control. You never want to get nosey with someone’s finances, but recommending a book that helped you is often well accepted if presented humbly.
Have you ever provided a loan to a family member or friend? Any other advice that you would give?