We all know the expression that “it’s better to give than to receive,” but lending money to family and friends can be a touchy subject. Loaning money to family members is a common practice in many households. The big question is whether or not it’s a smart practice. If you’re a natural giver like my husband is, you probably find that you’re more prone to sacrifice your own comfort to help others out. While this is indeed not a bad attribute to possess, it can easily cause you to get off the track of the plan that you’re working to get out of debt if the money isn’t repaid. This can cause your relationship with the family member or friend you lent money to become strained or worse even end.
Here are a few do’s and don’t to keep in mind when considering loaning money to a family or friend.
Talk it Over With Your Significant Other.
If you’re married or in a serious relationship with someone where finances are combined, it’s important to talk out financial decisions together. Lending money isn’t a decision you should make alone. Take the time to talk out the pros and the cons and be sure that both of you understand what you’re getting into if the money is given is not returned. The last thing you want to have is a strained relationship with a friend or family member that doesn’t repay the money and then have to come home to a strained marriage or household.
Ask if Can you Afford it?
Before you agree to lend money ask yourself “Can I afford it.” We’re often quick to agree to come to family members or a friends aid without truly thinking it through. By taking the time to ask yourself if you can afford it, you may realize that loaning the money will put you in financial jeopardy if an emergency were to arise and the money isn’t paid back. If you’re working to get out of debt nine times out of ten, you probably can’t afford to lend money, and if you can’t it’s okay. Ask if there is something else you can do to offer support instead. If you still want to lend money, lend only what you can afford. If you can afford to stop your debt snowball for one month to loan what would have been the excess payment this may be the way to go. Just don’t allow this one month to get you off track.
Question Their Past History and Intentions
When you are considering whether or not to loan money to family members, consider their history. Are they good on their word? Are they going to do something positive with the money like pay a bill or are they just looking for money to go out and purchase harmful substances? If the person that wants to borrow money isn’t good on their word, you might want to avoid lending any sort of monetary amount. Before you walk away from someone who may need money in your family, consider why they may need the money. If a person is sick or ill, this is a legitimate reason for asking for money. Hopefully, the family member will be honest about WHY they need the money, and this will help you come to a decision faster
Ask if They Are Willing to Sign a Contract
Most people who want to borrow money from someone get a little defensive when they are asked to sign a contract. If the family member is willing to sign a contract and follow-through, it might be worth it to loan them money. When writing a written agreement, you should specify the following: the terms of the loan, a timeline for repaying the loan, a schedule of payments, and what happens if the loan goes unpaid. A contract will go a long way in helping to avoid misunderstandings that may come about down the line.
(Another Great Article to Read: “Why I Combined Finances With my Wife”)
Learn To Say No!
If you can’t afford to lend money don’t. It’s completely okay to say no, and the word “no” does not need an explanation. You should not let the financial expectations that other people put on you guilt you into making the wrong decisions financially. If it’s a family member, you really want to support you can sit down and help them create a budget or a debt snowball instead. By teaching them these valuable tools, they will be better off and help to create a setting where they don’t have to ask for money.
Money Should Be Given as a Gift
This last section might not make much sense as you read the headline, but stay tuned. If a family member is genuinely coming to you and asking you for money, it can be hard to understand what to do. Loaning money to family can ruin relationships, make things awkward, and hurt both parties. One thing you can do instead of loaning money is gift the money. Since the majority of family loans fall through, you’ll still have your relationship at the end. Create a category in your budget specifically for Giving. This way if someone asks you for help you can at least, give the amount you have saved up. Even if it’s as little as $30, if they really need the money they won’t turn their noses up at it. At the end of the day, it is going to come down to money or relationship. And a relationship is always more important. Never loan or gift money if you are already struggling financially! Have you ever loaned money to a family member?
Have you ever loaned money to a family member? How did it go? Share your story in the comments.
These are all great things to consider if loaning family money! I know we have faced this decision before and it can be so hard to do. It’s one that should not be taken lightly when making the decision.
What an interesting topic for a post. Thankfully we have not had to deal with this but I know that if we did, I would certainly lend it if we had it!
I agree that lending out money to family is a touchy subject. I think if you’re going to lend the money, you have to expect there’s a possibility that it’ll never be returned or it may not be returned for a loooong time. It’s just awkward to ask for the money back. I think your suggestion of having a contract drawn is a good idea.
This is such a sticky subject. I have taken out a mortgage with my grandpa, but of course not without signing a contract and being clear with expectations. I am so happy that he was able to help me save money when buying my first home instead of giving the interest to a bank. I will always treasure what he did for me.
I have such a hard time saying no to family members. I always worry about peoples feelings. My husband is the opposite of me and has no problem telling his family he can’t do something. Love your tips! Something i need to work on.
I have a bad habit of doing this. I would have much less debt if I hadn’t made this decision.
Usually I just gift what I can afford. It eliminates the stress of trying to get back money that may not be returned.
I have loaned money to family and friends in the past and it never turns out the way I hope. I had to learn to say no because they were taking advantage and I know that is can only hurt the relationship. I tried to implement the saying about teaching a man to fish instead of giving him a fish. This doesn’t always go over so well but I like your tips!
This is such a hard thing! I like all of your tips. It is really hard to see a family member in need and not just jump in and help but that isn’t always the right thing to do. I agree that you need to make sure that you are capable before you loan the money. You can’t put yourself in trouble trying to save someone else!
You made many great points, Its hard to not help but you cant always do it. Thank you for sharing,
I lent 4 grand to a boyfriend when we were together to buy a piece of equipment for his job. We worked together sometimes so it was beneficial for both of us. But then a few months later he broke up with me and had only paid off a little bit of the debt. Luckily for me I’d had him sign an agreement and was able to refer (threaten) him with it when confronting him to pay it back. It was a messy situation but I’m glad I had that signed piece of paper.
These are very great points to consider whenever it’s about loaning money. Personally, I’ve never had great experiences whenever I loan away money so I’m usually very careful with this topic.