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Tips for Lending Money to Family and Friends

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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.

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.

How to Handle Money Issues with Family and Friends

1. 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.

2. Do the 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.

3. Consider Your Risks

If your relative or sibling 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 or she 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.

4. 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.

5. Offer Options

You may not be able to financially support those you love, but may be you can still help in other ways.

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.

6. 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).

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Jerry Recent comment authors
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Jerry
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I think borrowing money from family and friends is not a big deal as long as you have a plan to pay it back. It will lead to resentment if you don’t have a plan. That’s the only insurance you have to keep the relationship intact.

Tips for Lending Money to Family and Friends

by Pinyo Bhulipongsanon time to read: 4 min
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