Tips for Lending Money to Family and Friends

Mixing money and family typically is not an advisable financial move. All too often personal feelings get tangled up in a web of financial burdens and it can be a very unpleasant and potentially long-term bad situation. It can be made even more complicated when the ones you are closest to in your family are turning to you for help with their own debts, especially if you are just turning your own financial situation around.

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Are You Obligated to Help?

You certainly don’t want to see your mom and dad suffering without heat, electricity, or food. When they come to you for help you probably don’t even think twice about getting their bills paid off. But over time it seems the more you help, the more they expect. It may be your parents, your siblings, or other close relatives, but eventually the love you feel for family becomes jaded when you wonder, “What will they want next?”

It is a bad position to be in when on one hand you feel obligated to help, yet on the other hand you feel taken advantage of over and over again.

So what do you do?

Forget the Guilt

As an individual with your own financial obligations to meet, the matter of helping anyone else financially should be based on your financial abilities and not the obligation of blood relatives. It may sound harsh, but the logic here is that if their needs put your finances in jeopardy, everyone ends up in the same sinking ship. If you feel you have plenty to give, do it. But if your first concern is how you’ll get by while you help them out of trouble you need to seriously consider other options.

Do Your Math

Hopefully you are financially comfortable because you have been working on your budget and have been committed to saving. You should know where you stand and how much you can afford to help someone else. Look at your finances before giving anyone a definite answer so you can be ready with an specific amount. Leaving your financial assistance open-ended might be okay if you are independently wealthy but if you are working for a living, you need to ensure your obligations are met before you start handing out cash.

Consider Your Risks

If your brother is asking for a decent amount of money in the form of a loan, you really need to think about the consequences in the big picture.

  • Are you willing to never see that money again?
  • Are you prepared to deal with the fallout that will happen if he doesn’t pay you back?
  • Are you willing to get an agreement in writing and make it legal concerning the repayment terms?

You may think that your siblings or parents would never part ways over money matters but it happens to even the strongest families and you need to gauge your risks. You have to be comfortable taking your relationship from “just family” to “lender/borrower”. If you don’t treat your loan like a loan, you will never see any of the money returned.

Be Firm With ‘No’

If you decide you are not able or willing to lend out cash to family, be strong in your resolve to say no. Don’t delay in giving your answer. The longer you wait, the more difficult it will likely be. This may result in your giving in and handing over money you can’t afford to lose.

You can expect your relative to be upset with you. They see your financial success and wonder why you won’t help out. You’ve made good decisions while they have made bad, but they can’t see that. Stay strong in your resolve and do no waiver.

Offer Options

You may not be able to financially support those you love. When saying no, it may help to have some ideas or resources that can still be of use. Maybe you can offer to help go over their figures and help establish a reasonable payment plan. Perhaps you can accompany them to a debt counselor for emotional support. Know that your offer for help outside of money may be refused, but know you have done everything possible to be of assistance. Don’t let guilt trick you into changing your mind.

Prepare Your Agreement, Set Limits

If ultimately you decide to offer financial assistance or a loan, you should do it in a business-like manner by putting the terms and conditions in writing. To ensure you are repaid your loan, make your repayment expectations clear. If you can only offer so much cash, be upfront about how much and how you expect the money to be used. If the person receiving your help is not particularly keen on signing any agreements or they scoff at your requirements, it may be best to have them look elsewhere for financial assistance. It might be useful to discuss the matter with a lawyer as you will be creating a contract between you and the indebted family member. The contract should be written in compliance with laws — and also be actionable (meaning you can take them to court for lack of payment).



Author

By , on Apr 20, 2013
Tisha Tolar Tisha Tolar is a co-owner of Trifecta Strategies, LLC and the author of Gen X. When she is not busy being a fiction writer, she writes personal finance articles for several web sites.

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{3 Comments}

  1. Good advice Tisha. Basically keep things in perspective and do your homework. Even though it might be a close friend or relative you want to do it the right way and best protection yourselves. Our site is trying to build tools that can help in these situations – we want to make lending in this way a viable and trusted form of lending. Check us out if you have the time, thanks.

  2. KL:

    Very good points in this article, but I also think you have to consider the circumstances…will it be a one time thing that might be through no fault of the loved one’s control, like a job loss or disability. or due to making poor life decisions, like being an addict.

    It is one thing to loan someone a few bucks when it they are one disability and need a temporary loan for money for medication and they receive a check only once a month and have a track record for paying you back, and another for someone who habitually lives beyond their means or is a substance abuser and/or gambler.

    You are only doing a favor if it is the former category and not the latter because if you give them money, you become an enabler to a downward spiral.

    For a loved one in the latter situations, while foolishly giving money and only have them coming back asking for more like you are the magic money tree while living paycheck to paycheck yourself.

    I have turned down financial assistance, but given support in the form of food purchased and given or low dollar food gift certificates if they say they want money for food, when you know they will spend cash on something else.

    Also check into local programs that might help them and advise them to give them options. Keep in mind, as guilty as they will try to make you feel, you are not their only option. I also have reminded them I am a single parent living on a limited budget and that my resources are limited, which is true, but even if I was a millionaire, I would not be helping them by not telling them they are now an adult and they need to take responsibility for their own lives and help themselves as that is what I have had to do.

  3. Excellent tips! Great approaching to being realistic.

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