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!
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.
Recommend Lending Club or Prosper – If you’re not able to help the person in need, there are ways for them to get a loan through a peer to peer lending site.
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?
Frugal Living says
I would never lend money to my family members because I would never get it back
Peter Anderson says
Personally I don’t think I would ever feel comfortable lending money to family or friends just because it changes the dynamic of the relationship to one of borrower/lender – where there is an inherent power shift. I just don’t think it’s very healthy when it’s a familial or friendly situation – for money to become involved.
On the other hand in some rare circumstances I might consider giving money to someone if they truly needed it and I had no expectation of getting the money back. Of course it would have to be a dollar amount I would be ok with not getting back – especially if they aren’t able to repay. If they did end up repaying it would just be a bonus.
I personally do not think we should be lending to family. If we can afford to gift it, then let’s do it freely, not expecting anything back. This is The lesson I learned now.
I lent 5k to two family members because they were in great need one was going to lose The house and the other one had to pay a tax And “will pay back” after The sale Of The house.After years of patiently waiting, did not get anything back.
Last year this family member sold a property And refused to pay And got angry at me for asking them to pay me back. Now we are strained.
If you want to lend to a family member, dont expect it back.
When our kids ask for an advance on their (chore based) allowance we see if there are any jobs around they could do that we would have paid for eventually anyway (like going to the car wash). If they aren’t willing to do the work, they don’t really want the cash. Would this would work with adults? It may.
Tim @ Faith and Finance says
Very interesting take on the matter…At that point, you’re hiring them and not ‘giving’ money away, but if you shape it correctly, it might work well for both parties.
We have learned a very hard lesson about loaning to family and would never do it again. A member asked to borrow $7,000 for 10 days and it would be paid back. Unfortunately we were unwise as it was not money we could afford to lose. Eight years later there is no sign of the money nor the family member as they no longer speak to us.
U would loan money to a family member.
Tim @ Faith and Finance says
A lot of wisdom in these comments. It’s unfortunate to hear about so many strained relationships becasue of borrowed money, but it’s important for people to see how it really can have a negative outcome.
Thanks for sharing your stories about lending to family.
Derrik Hubbard, CFP says
“Before you lend money to a friend, decide which you would rather lose”
Jenna, Adaptu Community Manager says
I would lend money to my immediate family if they needed it. Not entirely sure about extended family members. I like the gift idea as a solution too.
if help family and feel good about that and your fiancée holds a grudge-even if do money separately-any thoughts