Any discussion of lending money to friends and family can be uncomfortable. A call or text message from a loved one in a financial bind can bring on a host of emotions. On one hand you want to help, alternatively, an unpaid loan can jeopardize a relationship. A recent study showed that close to 46% of adults who lent money to friends or family had a negative outcome.
Receiving a call from someone you care about who is stressed over a financial problem, can be uncomfortable. Whether it’s a vehicle that needs repairs or they are short on the rent bill that’s due soon, can make both parties feel awkward.
Whatever the financial obligation they can’t meet or money bind your loved one isn’t prepared for, they are calling you for help. What do you do? It’s one thing if a friend wants to borrow money for concert tickets but what if there is a true crisis?
Maybe the electricity bill is past due and requires payment within 48 hours or the lights will be turned off. Perhaps their vehicle has broken down and in need of emergency repairs. You know, without the car they risk missing work and possibly jeopardizing their job.
Loans between family members or friends can lead to somewhat complicated conversations and have their own unique set of issues. It’s not uncommon in families where there are different levels of financial success amongst family members. There’s that one person the family turns to for help in the middle of a crisis.
If you are considering lending money to a friend or family member, here are six things to consider when loaning money to a friend or family member:
1. Be clear about what you’re able to do.
It might seem obvious, but don’t offer more than you can afford.
Think twice about considering loaning out money that you need to borrow. For example, co-signing a loan. Another situation would be putting a large expense on your credit card because you don’t have the cash for it.
The family member may be coming to you because they can’t get a loan from the bank or they have reached the maximum on their credit cards. This is a sign that any loan you make to them could be at a high risk of default. Simply, they may not be able to pay you back.
I’m not suggesting that it’s all or nothing. Yet, there is no need to feel pressure or guilt to give the entire amount that the borrower is requesting if you don’t have it. Try this instead:
1) If you are handy and have the skills, offer to help with the plumbing or car repair issue.
2) Offer an alternative (lower) amount that you feel comfortable with not receiving back.
Consider if your family member is unable to repay you in the allotted time. Discuss all options and scenarios if your loved one defaults on the loan. If they are borrowing small amounts from several people, where do you fit in on the priority list?
2. Make sure you set out guidelines for the loan.
Balancing your relative’s privacy and your need to determine if it’s a loan worth making, can be tricky. Rather than handing over cash, what if you offered to pay the past-due bill directly or offered to send the payment on their behalf.
Be careful not to judge or shame your loved one for the situation they are in. But, be clear about the purpose of the loan.
3. The terms of the loan should be clear.
Before agreeing to loan them the money, make sure the terms for repayment are clear. The amount of the loan, the length of the loan, and the re-payment schedule should be direct and unambiguous.
Because lending money to family and friends has unique challenges, setting clear terms is necessary.
Understanding and empathizing with their dire financial straits is key.
4. Avoid Misunderstandings.
Consider the pros and cons of including the borrower’s spouse in the conversation. Having a witness such as a sibling or another relative might reduce misunderstandings.
Another way to cut misinterpretations and settle disagreements about loan terms is to get it in writing. Discussing loan terms might make both the borrower and the lender uneasy having the terms in writing is a way to protect both.
5. Lend Money for the Right Reasons
Once you decide to make the loan, that money is no longer yours. Steer clear from judging their choices on how they spend their money. The loan you have given them isn’t a reason to micromanage their finances.
Loans to irresponsible friends or family members is a recipe for disaster. Do not engage in lending money to someone who is incapable of meeting the loan terms or has a history of defaulting.
It’s hard to ask for your money back. You might feel guilty asking for repayment if you know they are in a desperate financial situation. But it can also be frustrating when you see them see them post a vacation photo with “YOLO” as a caption. Avoid being resentful.
6. Consider it a Gift
Only lend money you can afford to give. If you want to avoid creating a lender-borrower relationship consider giving a gift. Make it clear to the recipient that you are not expecting repayment but would accept it if they wanted to. You eliminate a lot of the anxiety that goes along with a loan when you let them know you are not expecting repayment.
As much as you want to believe that your loved one would never betray your trust, you should consider what happens if they are unable to make good on repayment. If your friend or relative defaults on the loan would it be the end of the relationship?
If you are in a position to help and would genuinely like to do so, just gift it. There are times when you have the money, and they need the money. It’s a win/win for both parties.
It’s a Tough Situation
You never imagine someone you care about not honoring their word and not honoring you. If you can afford it and it doesn’t feel strange, consider giving a monetary gift instead. But remember, it’s okay to just say no to family loans.
I have made loans to family and have had both good and bad experiences. It’s incredibly frustrating and also hurtful when calls go unanswered and your loved one ignores your texts. They say they’ll pay with the next paycheck but then a week, two weeks, a month passes by and you hear nothing from them.
Think about whether you’ll really want to actively pursue repayment if they default on a loan. Before you agree to the loan, spend some time thinking about whether you would pursue legal action or write it off as a gift.
The worst thing that you could do is let the situation sit around and fester into something that could tear a family apart. The longer you allow the loan to just sit around unpaid without addressing the situation might make you feel resentful.
Have you ever lent money to a friend, a relative, a brother, a sister, maybe even your parents? What was that experience like? How do you set parameters for loaning the money?